Over the past 18 months tech startups with disruptive ideas have been fast tracked to success as businesses scrambled to keep up with the new world order and automate old ways of working. We know that only the most driven business founders make it past the pivotal 3-year mark so if you’re experiencing a high-growth stage, you’ve already overcome much adversity and are well on the way to success. As the business grows, it might be time to consider moving into a new or expanded office space and with that comes a tough decision on whether to lease or buy your commercial property and which one really is best for business.
Buy Vs Lease Considerations
As a starting point, there are some key factors to take into account when determining whether buying or leasing commercial real estate will be better suited to your needs.
Location is imperative no matter what the industry; retailers need optimum footfall, creative and tech services need to be able to access a growing pool of skilled talent in an upscale location and manufacturers need graduates and skilled workers coupled with convenient public transit links.
The potential downside of leasing a property is that you can’t be certain how long you will be able to remain there beyond the terms of a lease and perfect locations are increasingly difficult to come by. The movement towards hybrid-working arrangements have led some business owners to question whether they simply need a smaller urban ‘hub’ where their teams can meet infrequently in a vibrant downtown location - that’s if they even need an office at all when the overriding sense is that employees want to continue working from home full-time. A crucial but often overlooked part of the buy or lease decision-making process is the cost of co-locating tech equipment and servers; once this is factored into the equation, it’s often more viable to opt for a space to house company equipment coupled with a team huddle space.
Business owners and founders often have a significant amount of personal wealth invested into their business and owning a property may be an opportunity to build upon this with the equity that real estate enables; real estate is generally considered a stable long-term investment and an attractive proposition for high-growth organizations because if there was a serious economic downturn affecting business, there’s always a valuable asset to fall back on.
Many business owners will be dissuaded from purchasing property believing that it will tie-up valuable working capital. A new lease usually requires a capital outlay of a couple of months’ rent at most and acquiring a commercial mortgage would generally require a significant deposit of 20% or more of the purchase price. It’s true that a balance needs to be struck between business growth and expenditure on property acquisition but lack of capital also needn’t preclude a growing business from property ownership; indeed, in our own experience, we have observed clients’ being funded up to 100% of the purchase price in many instances.
Lease costs can be included as an expense on tax returns whereas with a mortgaged building it’s usually only the interest that is tax deductible. Having said that, there are ways to reduce the tax burden of commercial property ownership and it’s always prudent to seek advice from an accomplished accountant to understand all scenarios as there are many ways a commercial property may be better protected as an asset, through the way in which the company is structured.
If you think that there might be a change in how you want to use a commercial property or you’re going through a period of rapid growth, you’ll need to think through the restrictions in regards to usage and renovation of leased properties. If it comes to the end of a lease agreement and you have to revert the property to the same condition it was in when it was occupied or leave fixtures and equipment that you’ve invested into, these can be costly oversights.
For businesses experiencing rapid growth and not wanting to pay for unoccupied space, you may contemplate using part of your ideal property to generate a rental income. Typically, a business only uses half of the space in a purchased property and this opens up opportunities for renting out your under-utilized space to a complementary business, splitting off the ground or upper floor for example and also leaves options open for future expansion.
While leasing a property offers a little more flexibility and some certainty in costs, buying a commercial property is often the right choice for growing businesses that have positive cash flow and want to see their hard-earned cash work for them. There’s a frequent misconception that you don’t have to worry about maintenance costs when you lease a property but of course, nothing is free and the cost of maintenance is often wrapped up somewhere in the monthly rental amount; an amount that is subject to increases at the mercy of the landlord.
Enlist the help of a professional network
Discussing your options with a seasoned commercial real estate professional will add the necessary clarity on the buy vs lease decision for your business. At Private Capital Group, we’re proud to be able to offer our clients access to our network of trusted professionals whose expertise can be leveraged to provide you with full transparency on the implications of your decision. There is no ‘one-size-fits-all’ approach to making the decision, it requires a careful lease Vs own analysis both financial and otherwise and a competent commercial realtor will be able to assist with this.
We want the best possible outcome for your business and that’s only possible with the right team to guide you. Reach out today to uncover your options around buying and leasing and how we might help you achieve your business goals with your next property.