By Gary Bowers, Attorney at Law
Whether you own or manage an existing business or are considering a new start-up, you will likely need to decide whether to buy or lease space for your business. Commercial property transactions can be complex, and there are a myriad of things to consider before you make this decision. The search process can be intimidating, overwhelming and sometimes oversimplified. One recommendation I often provide to clients at this stage is to consider hiring a licensed real estate broker (experienced in commercial sales and leases) to serve as your agent in the search to purchase or lease.
Where to Start in the Buy or Lease Decision
The size and type of business you operate will be your starting point. Many small businesses are home-based with no need for an office or store front. If you are starting small and all your employees can work virtually, you may be able to delay your buy/lease decision and save some money. Even if you need to rent space monthly or quarterly for face-to-face meetings, this may be less expensive than obtaining permanent space. If your business will have customers coming to you (retail, restaurants, etc.), or if you need specialized equipment (i.e., manufacturing space or an IT server farm), then you will need to decide the best options to meet the needs of your business today and in the near future.
5 Things to Consider
- Whether you buy or lease space, location is critical. This will differ by type of business; for example, if you are opening a restaurant, you will likely want a busy location, visible from the road, with easy parking and other active businesses nearby. A call center or operations facility may be located further out of town but in an easy-to-access area near the highway with adequate existing utilities. If you are buying the space, a desirable location may result in increased property values or help you sell or lease out the property quickly should you need to do so.
- The size of the space is also important. Think about what happens if your business grows quickly or if it declines in size. If you buy a space that is significantly larger than you currently need, you may be able to rent the excess space to another party. If you choose to lease space for your business, what options does the landlord offer for you to rent additional space or to sublet unused space? Can you get out of the lease early if you need to move?
- Consider improvements to the property. A landlord that is motivated to lease the space may offer to configure the space to meet your needs. If you need to pay for improvements, what will the cost be? Does the lease agreement require you to return the property to its original condition? If so, what will it cost you to remove any improvements? If you have added custom equipment, what will the cost be to move it to a new location and reassemble it? It may make more sense in this case to purchase the property.
- The financial picture is often the most critical factor in the decision-making process. A new business may not have the ability to get a loan to purchase property, pushing it toward a lease-only alternative. It can be helpful to have a conversation with a loan officer in the commercial lending department at your local banking branch; many of these folks take a strong interest in local businesses (new and old) and can provide guidance. Current lending rates, the organization’s credit history, the costs of repairs or improvements to the building, and potential gains or losses on the property should all affect your decision. It may help to sit down with your accountant to discuss cash flow, the tax implications and get a better understanding of the true cost differences. While it is fairly common for blue-chip businesses to be offered incentives by state or local governments, some smaller economic development organizations also have programs to encourage businesses to locate or refurbish buildings in their cities and towns. Check to see if there are any incentives offered in your area.
- Several other factors should be considered, as well. What is the current market outlook? The anticipated future outlook for commercial real estate in your location? Are property values expected to rise in your area, or is the market stagnant? If you choose to lease property, is the landlord in sound financial condition? Are there any zoning challenges or potential land condemnation issues that may arise during the term of your lease? You could be forced into an unanticipated move through factors outside your control.
Leasing or purchasing commercial real estate can be a complex process. You do not want to be in a position of signing a lease that is totally in the landlord’s favor and does not protect your rights. Likewise, when purchasing property, you want to ensure you have done your due diligence. I strongly recommend you engage a real estate attorney to review any contracts or paperwork before signing to ensure you fully understand the terms and conditions and that your interests are protected.
Want to learn more? Contact Brinkley Walser Stoner to schedule an appointment.