May 19, 2014

Three Steps to the Own vs. Rent Decision

By Don Catalano



The choice between owning and renting commercial real estate might seem to be a daunting one. However, it comes down to three factors -- what it costs up front, what it costs over time and the suitability of the space and the occupancy structure over the long term.

Initial Cost

Generally, leasing has a lower initial cost. Leases require security deposits, but not down payments. In addition, the landlord may make tenant improvement assistance available, further lowering the cost of moving in. Purchasing a building involve the cost of due diligence and inspections, the down payment, sourcing the loan, and tenant improvements.

Generally, commercial real estate prices and rental rates move in similar directions. When property prices are low, rents usually go down. On the other hand, times when rents are high frequently also feature high property values. This can take market timing out of the equation since, frequently, the best time to buy is also the best time to lease.

Ongoing Expenses

Comparing lease and mortgage payment might seem like simple math, but leases have an additional variable. While a fixed-rate loan's payments won't change, and the worst case scenario for most variable-rate commercial mortgages is easy to calculate, leasing has an element of unpredictability. If your lease arrangement doesn't have fixed increases throughout its life and into the option periods, you could end up at the mercy of the market.

Expense responsibilities can also vary. When you own a piece of commercial real estate, you have to pay for all of its operating costs and make needed capital repairs and improvements. If the space needs reconfiguration, it's also your responsibility. The situation with leased space varies, though. Triple net leases typically leave you responsible for all of a building's operating expenses, but leave the landlord paying some or all of the capital costs related to owning it. If you can time your reconfigurations to when your leases come up for renewal, you might also be able to get your landlord to contribute to the cost as a way to get you to renew your lease with him.

Long-Term Suitability

For many commercial real estate users, the decision between leasing and owning comes down to what they think will happen in the far-off future. Over a long period of time -- measured in decades -- it is usually less expensive to own than to rent. However, if your company's needs are likely to change 10, 15 or 20 years from now, the flexibility that you can get from leasing may tip the balance in its favor.

Many factors go into the own vs. rent decision. The first step in determining which is best for your company is to retain an experienced commercial real estate broker. He can help you calculate short- and long-term costs as well as provide an unbiased third-party view of your company and its commercial real estate needs. Once you have made your decision, he can also help you find the perfect for-lease or for-sale site for your business.


View some other great CRE articles:

3 Must-Haves for Today's Commercial Office Space

Signs It's Time for a New Commercial Real Estate Broker

To Renew or Not to Renew: Deciding What to Do at the End of Your Lease

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Don Catalano

Don Catalano