If you are considering finding a new commercial real estate space, one question to consider is whether you want to lease or buy a property. The best option for you depends on your situation, so let’s consider some important aspects you should think about while deciding whether you want to lease or purchase a space.
Cost is probably the first thing people look at when considering whether to buy or lease a property. Leasing commercial real estate is cheaper upfront than purchasing. Security deposits cost less than down payments and loan fees which you need to purchase a property.
This rule is not an end all be all, however. There are some instances where the opposite is true. If you need extensive tenant improvements to space, you can build them into your loan and spend less money upfront to purchase.
The popularity of a lease structure that ties rental costs to operating costs removes some safety from leasing. The tenants pay the same expenses as the owners, which runs the risk of having to pay for repairs and spiked energy costs. Long term, owning can turn out to be less expensive. Lease payments increase with escalation, while loan payments are fixed as long as your loan is at a fixed interest rate.
When deciding if you want to own a commercial real estate property, think about what kind of flexibility you want. If you own a building, you can sell it whenever you want, but you could lose money depending on your timing. When you rent a space, you are stuck with the terms of your lease, but you can move out when the lease expires with no cost to your landlord.
Leasing is more flexible and thus a good reason people consider it. If you are not sure about a property’s long-term prospects, the flexibility of leasing makes sense. However, if you intend on occupying a property for a long time, buying is likely the more financially savvy option.
Income Statement vs Balance Sheet
For legal and accounting reasons, leasing and buying commercial real estate property are two very different things. The leased property does not show up on your balance sheet, but rather you record the expense of your leases as operating expense on your income statement.
If you own a building, you report it as an asset and depreciate it while recording your mortgage as a liability. If you lease property, it keeps your real estate obligations and concomitant debts off your financial reports, and therefore many companies opt for this route.
To conclude, there are a couple of things to consider when deciding whether to lease or buy. It is a business decision, and your choice depends on your business priorities. Essentially, purchasing is a good idea if you intend on having the property long term and building equity. Leasing is a good option if you want the flexibility to move out when the lease ends, or do not want to tie up all your money in a down payment.