Commercial Real Estate Lease or Purchase?

As the real estate market in this region continues to grow and boom, businesses — both major corporations and small start up companies — may begin to question whether they should lease or purchase property for their business to locate.  The question is a valid one and the answer is simple – both!

At some point in time, every business has to question whether or not it would be best to own or lease their office space.  Whether the business is white or blue collar – from law firms and accounting offices to doctor and dentist offices, a fitness studio or a print shop; a new start up company or an existing business that has been in the market for decades, the decisions will vary.

There are a few basic factors to consider when making the decision to purchase or lease office space.

First, Cash Outlay would be a consideration when making this decision.  Generally speaking, a business will not need to put as much money up front when they lease as they would if they purchased.  Typically, when purchasing real estate, you would put a down payment of 15% to 20%, which in turn brings immediate equity to your purchase.

Second, you need to consider the Fixed versus Variable Cost factor.  If you purchase a building, a business owner will usually know what their costs are going to be from year to year, giving them a clear long term view at this aspect of their business costs.  This is especially true when the owner has obtained a fixed rate mortgage on the property purchased.  If you lease the property, the business owner will know generally what their costs are for the initial lease term.  However, when the initial term expires, the business owner will be subject to market conditions with regards to renewing a lease.  Also, many offices leases contain language that allows for annual increase to cover the costs of common expenses to the tenant.

Third, the Growth Factor can bring some concern to a business owner making this decision.  Buying a building or constructing a new building that is the proper size for you now can possibly hurt you later.  What if your business expands or downsizes?  If you purchased, you are faced with the decision of trying to sell the property and find another location.  Or, you could lease the entire or a portion of the property out to another business user.  If you have leased the property, you are faced with the possibility of being in a long term lease with either too much space or nor enough.  This can also be overcome by negotiating with your Landlord to expand in your existing building or possibly buying out of your lease so you can either expand or contract to accommodate your needs.

Additionally, when you purchase a building, you are entering a new business – the business of being a real estate investor – having real estate that will hopefully appreciate – or what we refer to as theAppreciation Factor.  This gives you the ability to sell the building, at a profit if you are in an area with appreciating land values, or move out and lease the property to another business user, buy or build something larger than you need and lease a portion to another business user.  All of these can be very profitable to the Real Estate Investor.

Finally, an aspect that all business owners deal with is tax issues.  The Tax Factor will always come into play when making the decision to purchase or lease office space.  In a lease situation, many businesses regularly write off the full amount they pay in rent.  Owners of real estate can generally write off many aspects of owning the property – repairs, improvements (depreciated), interest on the loan, property taxes and other qualifying expenses.

Should you purchase or lease?  Depending on the type of Real Estate user you are either can be beneficial — just consider the basic factors above when making the decision. There are positive aspects to both purchasing and leasing office space with real estate owners having fixed costs, numerous tax deductions, additional income and the ability to sell over time thus creating a retirement fund.  On the lease side, businesses who lease space enjoy more flexibility of finding prime property to locate in, free up working capital and have more time to make their business successful as they can focus entirely on running their business.

Middle Georgia has a variety of office space available for business owners when it comes to making this decision.  Properties such as Arkwright Landing and its new sister development, Arkwright Crossing, offers a business owner both.  They have the ability to purchase their property and customize a building to meet their needs or lease an entire building or a portion of space in a building.  A unique attribute with this development is the opportunity for the business to work with a full service, multi-dimensional real estate firm that has been in the Middle Georgia Real Estate market for over seven decades – Fickling and Company.

Wendy Pierce
Commercial Real Estate Agent
Macon Commercial Office