By David Creed
Small business owners are calling our commercial real estate office a lot lately and many of them have the same question – Should I lease or buy my office space? Two major factors are initiating the discussion:
- Historically low interest rates – With money so cheap, (how cheap depends on the term, amount and down payment of your loan), many business owners assume it’s a prime opportunity to buy. After all, why rent when you can gain equity?
- Altered accounting standards – In the summer of 2010 the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a draft that, if enacted, will frame leases as liabilities. Currently a company’s lease’s net present value is not included in debt, which could be considered a perk to leasing. The boards are scheduled to make a final decision on the proposed draft sometime this quarter (April-June 2013).
To help my clients get a high-level idea if buying is right for them, I issue this preliminary “Lease vs. Buy” questionnaire. It helps ensure the basics have been thoroughly considered before we move on to an in-depth financial assessment.
- What are your long-term requirements? Buying may be the rightmove now, but if relocation or significant expansion/downsizing is slightly possible in the next few years, leasing may still be your best bet. Here’s the logic: If you need to make a change, all leases come to an end and you’ll be able to make your move without much hassle. However, if you own your building, you’ll need to sell or lease it to accommodate your business’s evolving needs.
- How does location affect employee retention and hiring? If your office must be located in a specific area of town like the central business district to accommodate your employees, your options for getting the best deal on commercial real estate may be limited. Further, your possibilities for investing in an “up-and-coming” or “trendy” area where you have the opportunity for a lower cost per square foot and a larger future return on investment may be narrow. Oftentimes these trendy areas aren’t yet positioned near the amenities your employees are accustomed to enjoying in typical office districts.
- How does your location affect customers or clients?If customers or clients visit your location frequently, it’s typically an indicator that your location is key. Similarly to the above rationale, when a specific location is required, your options may be limited, which diminishes some of your buying power.
- Can you effectively manage the real estate without a professional landlord? Chances are, if you’re currently leasing, the building manager has a cleaning and maintenance crew who take out the trash, replace light bulbs, maintain the bathroom, etc. Are you prepared to take on these responsibilities or hire someone who can?
- Could your down payment be better applied to operating expenses? – Sure, buying a building may be a great investment, but your business may be a better investment. Would you be better off investing the cost of a building in your business? And would your time be better spent working on your business instead of maintaining a building?
- Does your company require specialized or hard-to-move fixtures and equipment? – If so, this is a reason to buy. There’s no need to constantly lug equipment from leased space to another. It requires time, money and your patience.
In general, this is undoubtedly a great time to buy. If most of these caveats don’t affect your company’s continued success, I suggest you seriously consider buying a building for your business. You have an opportunity to get in the real estate game when prices are still low. They won’t stay like this for long. Further, you can diversify your investment base and potentially grow your income.
David Creed is senior advisor at Sperry Van Ness (SVN) Nashville, a Music City commercial real estate firm with an international network 100,000 strong. The SVN Nashville team provides commercial sales and leasing services, tenant representation, asset management, property management, corporate services and consultations.