It’s the age old question for business owners: Should I lease space for my business or should I buy an asset to call my own? There certainly are some benefits to proprietorship, such as depreciation and pride of ownership. However, more times than not it is beneficial to lease. Here are 5 points to consider before making a real estate purchase.
1. The ability to reinvest your profits. This is pretty cut and dry. As a building owner, it is likely that your net operating income will not only go towards paying down debt but also the maintenance of your facility. And those repairs add up pretty quickly. Mechanical, roof, and parking systems can be expensive to sustain but a necessity to maintaining the building’s function and value. As a tenant you can take your company’s returns and reinvest them to grow your business while your landlord worries about building issues. And, in good years, you even get to put some of the profits into your pocket.
2. It will cost you more for repairs and maintenance than your landlord. And they will get the job done quicker, too. This is that pesky law of the economies of scale. This concept essentially states that as the amount of a good or service increases, the cost per unit decreases. With repairs needed every once in a while, your cost per repair will be much higher than that of the landlord. A larger landlord often has longstanding relationships with contractors from the maintenance of multiple commercial facilities all year long. Additionally, since the contractor relies on the landlords business, all jobs become a priority, and get done quicker.
3. Structural reserve. This goes hand in hand with repairs and maintenance. Lender requirements usually dictate that money is set aside for structural reserve; however, if it’s not a loan obligation, it’s good security to have in place. This is calculated as a percent of the net operating income and used for larger, capital expenses such as roof replacement and parking lot work, items that the landlord is typically responsible for per the lease. Again, a good portion of your company’s profits must be put towards your real estate expenses, instead of reinvesting it into your business.
4. Finding tenants. If you own a facility and occupy a part of it, you are left with some empty space to fill. Chances are that you want or need the additional income. Depending on the market, it may or may not be easy to find lessees. Markets fluctuate, and it takes time and resources to secure tenants. In today’s economic situation, you are competing with many other building owners for occupancy and may not get the income you had anticipated.
5. Building management. This can be a full time job in and of itself, let alone simultaneously running a business. Fielding tenant calls, doing the accounting, collecting rent, handling that leaky roof and the toilet that won’t flush will all become a part of your daily life. As a building owner, be prepared to take on a lot of additional responsibilities. As a tenant, your landlord would most likely be responsible for day to day maintenance, depending on the lease. With a landlord in place, you have less to worry about, leaving you with the ability to focus on the current operations and improvement of your company.
Depending on your goals, building ownership may or not be for you. Keep in mind how each of the above points will impact your business, both financially and operationally. Consider it carefully when making your decision whether to own or lease commercial real estate.