While many small business people dream of buying their buildings, many of the largest and savviest companies choose to lease their commercial real estate. Opting to stay a tenant doesn't just reduce up front costs. It also lowers ongoing expenditures while also giving your business greater flexibility. If you're on the fence between leasing and owning, here are five great reasons to stay a tenant.
Reduced Move In Costs
Moving into leased space is usually less expensive than purchasing commercial real estate. Even the lowest cost SBA loans typically require ten percent down, plus the cost of any loan fees, third party reports and other purchase-related expenses. Leasing, on the other hand, usually just requires a security deposit and payment of the initial rent. Landlords will even frequently build in the cost of doing your tenant improvements for you.
Lower Monthly Occupancy Costs
While it is possible for purchasing to be less expensive than leasing, most tenants find that leasing is the better deal on a month to month basis. Leasing is further discounted on an after-tax basis since 100 percent of your company's lease payments are usually deductible, while only the interest portion of a mortgage payment would be a write off.
Cleaner Balance Sheets
Commercial real estate leases are almost always off-balance sheet transactions. Every month, your company shows an expense for the lease it pays, but your space has no impact on your overall assets and liabilities. When you own a building, on the other hand, you end up increasing both assets and liabilities (assuming that you have a mortgage). Furthermore, the space has to be depreciated over time, potentially leaving you with both capital gains and recapture tax liability when you sell the space.
Reduced Capital Expenditure Liability
One of the benefits of leasing space is that if it starts to approach the end of its life, you don't have to stay. When you own a building, it usually requires constant reinvestment to combat aging and obsolescence. With leased space, though, you can always move to a better or newer building when your lease expires. Alternately, you can require your landlord to make any necessary upgrades, updates or repairs as a part of your commercial real estate lease renewal negotiation.
When you own a building, moving typically requires you to sell the building. If the building remains desirable both from configuration and locational perspectives, you should be able to sell it at a break-even price or a profit. However, many owners end up having to sell their newly vacated buildings at a discount, especially if the same factors that make them want to move also make the property unsuitable for a similar business.
On the other hand, leased space leaves you in the driver's seat every time the lease expires. If your needs change, newer and better properties come along or if the area becomes undesirable, you can move out. This leaves the landlord taking the real estate risk. But keep in mind, if you negotiate your lease with renewal options, you can stay in the commercial real estate space, frequently at a pre-negotiated rent. In either case, you are in control of your destiny, leaving the landlord with the renewal risk.