Owning property versus leasing: it’s an old debate. It’s also an incredibly important question when you’re considering a new space for your business.
You’ll find convincing arguments for both sides. People who support leasing generally point out the benefits of flexibility. Craig Walker, CEO of Dialpad Inc. and founder of Grand Central Communications, believes that an upcoming disruption in employee workspace and productivity requirements will convince businesses of all sizes to embrace leasing. A recent move by IBM seems to support Walker’s theory: the company now leases millions of square feet rather than buying or building its workspaces, as it did in the past.
The pro-ownership side typically looks at real estate as an investment. Media mogul and entrepreneur Armstrong Williams falls into this camp: “Repeat after me: Real estate provides the highest returns, the greatest values, and the least risk.”
Both sides of the lease-own debate are correct, but is there a ‘best choice’ for your company? We have had this conversation with our clients many times over the years. Our advice?
- Look at your options regarding business only (it’s easy for emotions to inadvertently impede judgment).
- Think long-term about your business needs.
- Carefully consider all the pros and cons before making a decision.
If your facility requires expensive, specialized, and large equipment, buying may be your best option. One of our manufacturing clients exemplified this issue: Moving their expensive machinery would have involved cutting holes in walls, using cranes, and hauling oversized loads. It was easy to see that buying well outweighed the cost of having to move when a lease was up. Other requirements particular to your company, like the type of facility or a specific location, may also tip the scales in favor of ownership.
Tax deductions can sweeten the deal, especially when you add up depreciation, mortgage interest, capital improvements, maintenance, and operating costs involved with the property.
Space can be re-leased to your company if purchased separately, creating a cash return on investment. That tactic also provides an opportunity for equity to build, and you may be able to leverage that asset later in a sale, thereby realizing the value the company brings to the building.
You may be able to lease extra square footage to other businesses, thus generating revenue and defraying some costs.
Leasing out your extra space is rarely as simple as you think. There are commissions, attorney’s fees, and capital improvement costs involved. You may see your new building as perfect, but your new tenant may want to change the carpeting, rearrange the meeting rooms, and knock out the walls.
Functional obsolescence is a real issue. For example, let’s say you bought a warehouse building in 2005. A 24-foot clear height would have been pretty standard, but today many tenants demand 30-foot and higher which translates to more storage, which translates to savings. Unfortunately, you bought your building so you can’t move to a space that offers higher clearance and greater functionality. You’re stuck.
You need to have an exit strategy. You may think you’re going to stay in your new building forever, but what if you wanted to bring on a new division or launch a new product line? It can be hard to sell commercial real estate buildings, especially if they are customized. Consider another example: After a company built a 50 million dollar slaughterhouse facility, the division shut down. The company now had a large, very specialized property in a rural area, and will probably take a huge loss when they do find a buyer.
That example points out another problem with buying: Buildings are only worth money if you have tenants.
Your cash is not tied up in an asset. By staying liquid, your money can support core business operations or other opportunities.
Your business can grow and change as needed, without having to stay within the confines of a specific building or neighborhood.
Your company can occupy space in a premier or strategic location you might not be able to own outright.
Renegotiating leases can be problematic (but we can help with that).
Aren’t there more “cons? Not really. For most of the companies we work with, leasing is generally the better option for their businesses. Notice those words; “for their businesses.” When you need to make a move and are debating leasing versus buying, try to put aside the idea of investing in real estate and concentrate on what’s best for your business.
That said, constructing a building might be the right solution for your company if your needs fall under the pros of ownership listed above. As you can see, “buy or lease” can be a tough choice, but we can help. We can walk you through the decision-making process and help you implement the decision that’s right for your business.
We understand the commercial real estate business and have years of experience behind us. We are solely tenant and buyer-focused: we do not represent landlords, so there is no conflict of interest. If you’re looking for new commercial space in the Dallas-Fort Worth area, we’d like to help you move in the right direction. Call us today.