Commercial Real Estate – Should You Lease Or Own?

Business owners often contemplate whether they should own the building their business occupies or lease it. Commonsense would dictate that the entrepreneur should buy their facility and “pay themselves” rent and thus build long term equity. Large decision like this, however are rarely that simple and have both objective and subjective factors that further cloud the question.

For example, objective factors include financial limitations (do I really have enough cash?), tax benefits (Does my business really make enough money to benefit from the tax shelters?), potential long term equity build up (Is my local real estate market growing or shrinking) or space growth needs (will I need to move to a larger building in the short term?). Subjective factors include business image, control or pride of ownership, etc. Forces outside of the business owner’s control, such as the general economy, interest rates and future potential appreciation (or depreciation) complicated the question.

For many business owners the main question really comes down to A. do I have the required 10-20% to put down and B. can my business really afford to tie this cash into the property? Commercial real estate is not liquid. And once cash is put into it, there are only 2 ways to get it out. 1. Get a new loan 2. Sell the property. If buying a property means your business will be cash poor you may want to either put your purchase plans on hold, find a lower priced property or scrap them altogether.

As far as down payments borrowers can still get fixed rate financing at 90%. In fact it’s still common to get 90% loan to cost financing. Meaning, if you were considering buying a property at $1,000,000 and it needed $300,000 in improvements/build outs. You could finance 90% of the $1,300,000 and would only have to come out of pocket $130,000.

Also, many business owners are curious if there would be a cash flow savings on their monthly payment by owner. The down payment and current interest rates normally answer this. Although obvious, the more the borrower puts down, the longer the amortization period and the lower the rate – the lower the monthly payment. But it’s common right now with rates in the 6%’s to see a small cashflow savings if the loan is at 90% with a 25 year or more amortization schedule.

Another consideration besides the money is growth plans. If the business is in the beginning cycles and is expecting to expand rapidly than the business owner should have an idea of what he will do with the building once they move out – rent, sell or keep part of their operations in it. These are simple questions with complicated answers.

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