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To Buy or Lease Commercial Space for your Business?

This is a question with a number of opinions.  I’ve found these opinions are similar to political views, the conviction many business owners feel toward their opinion is unwavering and anyone who thinks differently is clearly maladjusted!  Many business owners are adamant about owning their own building as a way to build wealth while others prefer to lease space and write off the annual lease payment as an operating expense.

One consideration right off the bat is the capital expense required to own a piece of property vs. leasing.  Even more so in today’s economy given the current loan to value ratios most banks are willing to lend at.  Many business owners view that capital expenditure at a significant cost.  For example, if you need $200k as a down payment toward a purchase, some would argue the same capital is better spent being put into the business to grow the operations.  Where as, if you were to lease the same property your initial costs are minimal and any property management issues are someone else’s problem.  If you are among those with this outlook you are in good company as most fortune 500 companies do not own their real estate.

On the flip side, there are others who can’t bear the thought of leasing space year after year and having nothing to show for it at the end of the day.  Over the past decade, if this was your philosophy you probably made out well considering the appreciation we’ve seen across all types of real estate during this time.  Putting aside the capital expenditure required to own real estate, one advantage for a business owner is the ability to own the real estate under a corporate entity or trust and essentially have the business lease the space from the business owner thus giving you the flexibility to write a lease above or below market rents depending on your situation.  Ultimately, this can also lead to an additional stream of income to the business owner.  Also, worth noting is the value that is created once a vacant property is purchased and then occupied by a business.  When this happens the property can now be evaluated by the income generated by the value of the lease and not just the value of the vacant real estate.

These are just a few examples of the arguments for and against owning commercial real estate for your business and there are many more but as I stated above, most business owners feel strongly one way or the other.  I’d like to know what you think on the subject… please feel free to comment below.