“I don’t like paying rent. My dad always told me to buy” is a common theme heard from business owners. However, even though the American dream is to own, there are many business owners that do elect to lease. Why do they do it? Banks and insurance companies often do not like to tie up capital and feel they can get a better return on their dollar by investing in their own specialty. Technology firms are in a risky business and don’t like long-term obligations. Some companies wish to invest their time and energy into their company, rather than the headaches related to the ownership and management of property.
Advantages for Leasing
- Owner generally takes more risk for the building than the tenant
- Rent and tenant improvements are fully deductible as an expense
- Lower initial costs
- Easier to reach a consensus by organizations with many partners, boards of directors, etc.
Disadvantages of Leasing
- Rental payments are never recouped
- Problems with landlord
- Lack of control over neighboring tenant and the property
- Rental increases at renewal time
- May be forced out by a growing neighbor
Advantages of Owning
- Ultimately some type of return on your money
- Pride of ownership
- Diversification of assets
- Hedge against inflation
- No landlord problems
- Tax and depreciation advantages
- Stable address for your business
Disadvantages of Owning
- Not easily liquidated
- Future unknown and always increasing government regulations (i.e., asbestos, ADA, environmental laws, radon, etc., etc.)
- Property management issues
- Total liability for keeping the property fully occupied
- Exposure to liability and law suits from accidents
- Your business might provide a better on the dollar return than real estate
- Building obsolescence
- High up-front costs, capital tied up
For companies contemplating purchasing a building, some of the headaches might be mitigated by the use of a property management firm. Commercial real estate managers keep apprised of never-ending government regulations, and they are well organized to keep up the real estate, collect the rent, and lease out unused space or ultimately sell the building.
Still, your business should take a very hard look, along with your accountant, at what’s referred to as your opportunity cost. In other words, for every dollar your business spends, what is its return? Three percent? Twelve percent? One hundred eight percent? Commercial real estate is similar to the stock market. It’s a gamble. Some owners lose their shorts, some reap terrific rewards, but over the long haul, the targeted return is about 8 to 10%. So unless you simply wish to diversify your assets, you need to look at whether you can make more money in real estate or in your business.