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Commercial Real Estate Lease vs. Purchase

The purchase side of the lease vs. purchase equation usually comes into play when your company’s needs are fixed and predictable for the long term. If you know that your needs won’t change for at least a decade or more, purchasing can be a good option. It gives you total control over your space and a great deal of certainty over cost and what you can do with the space since, after all, you own it.

Is it best to lease or purchase commercial space?

The type of business you have, your future goals, your financial resources and the conditions of your local commercial real estate market are some of the factors you’ll need to consider.

Reasons to Purchase

Purchasing also gives you a chance to participate in the potential appreciation of the property. For many businesses and most locations, the downsides of purchasing and tying up capital are greater than the benefits that come from the potential appreciation. However, if your business is one where appreciated property can form an exit strategy or if you are in a position to control highly valuable property, purchasing may be a wiser option.

The Benefits of Leasing

Many of the most successful companies come down on the leasing side of the purchase vs. lease decision for several reasons. Leasing is more flexible, less capital intensive and offers more options.

The flexibility benefits of leasing are very simple. While it’s technically true that buildings can be sold on the market, the usual case is that finding a buyer for your building, especially at the desired price, can take months or years. With a lease, though, you can move out whenever your lease expires. If a building needs work, you can leave that work for the landlord as well. If you’ve negotiated extension options in your lease, you can choose to automatically renew it, providing maximum flexibility.

Leasing helps to conserve capital in three ways. First, moving into a leased property usually requires a lower initial investment than purchasing a building, simply because rent and security deposits are usually less than loan costs and down payments. Second, lease payments may be cheaper than mortgage payments. Third, while the accounting of leases is shifting, leases are still treated differently than building purchases when it comes to the principles of building your business’s balance sheet.

Finally, coming down on the lease side of lease vs. purchase decision gives you more options. The number of desirable purchase options in desirable locations that suit your company’s needs is likely relatively low at any given point in time. Leasing gives you more options.

The lease vs. purchase decision might seem like it is weighted towards the lease side, and, in many cases it is. However, your company may have unique needs that make the typical rule of thumb inappropriate. The best way to choose between lease vs. purchase is to work with a highly skilled commercial real estate advisor who can give you the information and insight that you need to make an informed business decision.

howardcommercial is a commercial real estate advisory firm focused exclusively on representing tenants, owner-occupiers and investors. Please feel free to contact us at 314.821.0085 or to discuss your real estate requirements.

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