It’s a decision point that comes when the lease is coming due, say a year or more out: Lease, keep your cash liquid, and continue paying down someones note; buy and invest in an illiquid investment that offers stability and equity. While every industry vertical has its own fundamental real estate requirements, every enterprise and every business plan is different. And don’t forget to add in the risk variables of market performance and net profit or loss.
Only you, the business owner, the partners, or the C-Suite will be able to evaluate all the possibilities, metrics, needs, and aspirations. Here are our tips on how to weigh what’s right for your business, and hopefully turn what looks like a risk-filled snow globe into your crystal ball.
Door #1: Own commercial property
Peter Lynch, an investor, mutual fund manager, and philanthropist, is one of Forbes 100 Greatest Living Business Minds. While his career has been in aggressively managing investment funds, his advice applied to commercial real estate ownership is sage: “Know what you own, and know why you own it.”
The Considerations:
- Particular and unique circumstances – such as when it is not easy to replicate the facility and it is prohibitively expensive to move. If you are installing millions of dollars in machinery and fixtures, which in some instances are collectively worth more than the building itself, buying brick and mortar can make sense. In these similar circumstances, leasing may tip the balance of power in favor of the landlord. Conversely, if your business is engaged in bulk distribution or light manufacturing, there is, comparatively, less of a challenge to picking up and moving to a more functional, modern facility or a different location with better lease terms. If you know you are going to stay for a while, then buying can make sense.
- A long-term strategy that will bring exceptional value to a building can warrant buying over leasing. The upside is that if bought separately from the enterprise, the space can be leased to the company. This creates a cash return on investment for the purchase as well as an opportunity to allow the equity to build for the owner. For the enterprise, it keeps the monthly rent in the operating costs column.
- Managing the property is complicated and will require an owner to comply with health and safety regulations, manage contractors or maintenance staff, and possibly execute binding lease contract responsibilities. There will be attorney fees, commissions, and possibly critical upgrades to comply with commercial building codes, and your potential leasee may also demand additional upgrades. It’s a cost regarding time, effort, and money, which in certain circumstances may be worth it… Maybe.
- Tax deductions that might sweeten the deal include depreciation, mortgage interest, capital improvements, maintenance, and operating costs associated with the property.
- Finally, real estate investment and development firms are in the business of buying, selling, and owning and leasing. The business model is driven by maximizing returns. The commodity being traded or the service being provided is real estate. In this vertical, withholding emotion is an absolute requirement for success, as is having thick skin and a considerable amount of capital to launch.
Door #2: Lease commercial property
Craig Walker, the CEO of Dialpad, Inc., a cloud-based business communications systems company, and a founder of GrandCentral Communications, which Google acquired in 2007, believes that a major disruption in employee workspace and productivity requirements is just around the corner. His forecast supports leasing for all sizes of business because of its inherent flexibility, saying, “ Large companies will also look to reduce their real estate commitments and move more to flex desk options.”
Last March, Quartz.com reported IBM, which once boasted that 40 percent of its global workforce worked remotely, which allowed it to shed 78 million square feet and save roughly $100 million annually, dramatically reversed itself. It now requires the majority of its US employees to work in one of its seven locations. The upshot is that IBM is also preserving its flexibility by leasing millions of square feet instead of buying or building its workspace, as it had done in the past.
- Depending on availability of cash and core business priorities, leasing will ensure that cash is not tied up in an asset, but remains liquid to support core business operations or to pursue expansion, or other opportunities.
- If the lease is structured properly, it should enshrine flexibility. Just like IBM above, it should allow for the ability to expand or contract physical space to match the scaling of the business. Of course, this must also remain financially reasonable for the landlord, as well.
- Longer lease terms typically produce more tenant improvement dollars and better concessions such as free rent, monument signage, and more. There is a fine line as to what the right lease length should be. A smaller user, which can more easily relocate, may seek out a lease that is shorter, like three to five years. A full-floor user is likely better off with a lease time frame of seven to ten years. In the longer leases, we like to include a termination clause and flexibility options for our clients.
- Landlords like to use renewals as a juncture to squeeze tenants for a higher rate, whether or not it is in-line with the current market rates. Often a leasee will feel obligated to meet the landlord’s demands or start the costly exercise of relocating. This need not be a difficult experience if an experienced broker representing the leasee negotiates. Remember, the landlord does not want to lose the tenant because the process of finding a new one is also costly.
Would you go to court without legal representation? Likely not. You shouldn’t lease or buy space without representation either. We do this for a living and have the experience of hundreds and hundreds of transactions over the course of many years. We know how to ask for the things our client wants in a manner that will command the desired result.
Our tenant representatives are solely tenant and buyer-focused. They do not represent landlords, so there is no conflict of interest. If you’re looking for a new space and don’t know where to begin, the tenant representatives at Whitebox Real Estate can get you moving in the right direction.
Call us today for a consultation, and we’ll get you started on your way to a better office space for you and your employees!
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