With so many opportunities in the market, it can seem confusing: leasing versus owning. Many business owners are faced with the decision of whether to continue leasing space or purchase a property suitable for their needs. Lease rates are low, but properties in some cases are also selling for fifty cents on the dollar. Several factors should be considered when making this decision.
1. Available Cash. Depending on the type of loan selected, an individual looking to purchase commercial real estate can expect a down payment of 10 percent to 25 percent of the purchase price. It is typical to see individuals select an SBA loan if their business plans to occupy 51 percent of the property. An SBA loan can, in most cases, get an owner in with a minimal down payment and a very favorable interest rate.
2. Future Business Growth. Certain business models might call for multiple locations, and the risk of owning and allocating a great deal of cash toward down payments might be outweighed by the flexibility and mobility a lease provides. In addition to multiple locations, business owners might run into a situation where they outgrow their current location. If an owner owns a building that becomes obsolete for his or her needs and needs to lease additional space or purchase an additional building, the costs could be higher in the long run.
3. Costs. The stability that owning provides can help one predict future costs. Leasing provides for an unstable cost structure. Lease rates will change with the market and can be impacted by a variety of factors out of the control of the lessee.
4. Tax Benefits. One should really talk to their accountant regarding the tax benefits of leasing versus owning, but it is known that there can be benefits seen with both scenarios. It is best to weigh the benefits of both scenarios while taking in consideration your business model. For example, a property owner can take advantage of depreciation on improvements completed over time and one can also write off any interest payments. This write off could exceed the costs of leasing.
In the South Metro Denver market, we have seen many individuals exercising leasing options as well as purchases. Many small business owners now working from their home feel that it is a good time to expand to a commercial property through a lease, while others in existing leases are now looking to lock in payments by taking advantage of low interest rates and secure financing to purchase a property. Depending on the business and the factors discussed above, each business can find the best option for their future.
Evaluating the two options can be overwhelming; therefore, we encourage business owners to seek advice from a knowledgeable real estate broker, a commercial lender and a CPA to review the options together. The real estate broker will compare purchase prices versus lease rates. With the right information, this decision can have a positive impact on the future of the business. Below is a very basic lease versus own analysis for a 2,000-square-foot building (based on current market rates):
Lease rate equals $15/SF/YR NNN, or $2500/mo
Purchase price equals $175/SF or $2055.31/mo with an SBA 504 loan
SBA 504 Loan Proposal
Purchase Price $350,000
Equity Injection $35,000
Loan Amount $315,000
1st Mortgage (50%) $175,000
Amortization 25 years
Interest Rate Fixed for 3 years 6.25%
Loan Payment $1,154.42
SBA 2nd Mortgage (40%) $140,000
Amortization 20 years
Interest Rate Fixed for 20 years 4.70%
Loan Payment $900.89
Total Loan Payments: $2,055.31