It’s the big question that every owner of a growing business eventually must face: Should I buy a building or lease space?
Answer wrong and you could be in trouble — either by locking your firm into a long-term financial deal that sucks your profits dry or by discovering after the fact that you missed out buying or leasing the only building that could satisfy your company’s exact needs.
So what can you do to keep from making a mistake? There’s no magic bullet, but there are steps you can take to lower your risk of a major faux pas. First, do your homework and weight the benefits of each. That said, here are some issues to consider:
The pros of buying property
It builds net worth. “Typically, a small business owner can create a very favorable financial situation,” explains David Browning, managing director of CB Richard Ellis. “If a family or individual owns the property, he or she can lease it to their company. The company then pays rent.”
This allows the owner, individually, to build personal equity and net worth. And, says Browning, it’s a way to ensure lower financial liability for one’s company. The onus of everything beyond the monthly lease payments falls on the owner, not the company.
It can lower your overhead. In today’s favorable interest rate market — though that can easily change at the feds’ whim — you can reduce business operating expenses by owning property. Explains Browning, “With a low interest rate, your net effective operating expense after paying the mortgage, taxes and insurance is typically lower than if you had leased the property.”
Browning cites larger businesses such as Progressive Insurance as examples of companies that have significantly lowered their operating overhead by owning the property in which their corporate offices are housed.
You can control your property needs. When you own a building, you can control the building and your company’s fit within it, says Thomas Gustafson, a broker with Colliers International’s Office Services Group. “As other tenants expire, you can grow your company to take their spaces. You can control the property in terms of signage as well, basically any way you want that building image to fit your company image … or vice versa.”
The pros of leasing
You get built-in flexibility. Most businesses have changing needs in regard to their facilities. “One of the big benefits of leasing is flexibility,” says Browning. “A business can expand within the building they’re already housed in. They can downsize within that same building as well.”
The 1990s, he maintains, have become an era in which businesses demand flexibility. “We’re seeing many more shorter leases. Firms want to be able to tear them up and move whenever they want. And either it relates to a difference in the size or configuration of space, or the proximity to their customers.”
Shorter leases also allow business owners to change direction quickly, should their business needs — or industry — suddenly change.
Someone else gets the headaches. “You’re a tenant, not an owner,” says Gustafson. “You pay the rent and come and go as you please. If you lease, you and your company are not burdened with ownership issues. Those are left to someone else to deal with.”
It expand your options. There are a lot more properties available to lease than to own, says Browning. “There really is a shortage of buildings to buy. Owners want to hold onto their equity.”
It’s a phenomenon that’s relative to Cleveland, he says. “A lot of people own real estate here and view it as a good investment. It looks good on a balance sheet. Therefore, we have many fewer properties that sell on a year-to-year basis vs. other markets.”
Properties for lease, on the other hand, are widely available, and there’s a greater choice of size, shape and location. This is especially useful to companies which need to change locations quickly.
So what’s the answer for your business? That, says Browning, may be simpler to decide — and more difficult — than it appears. He suggests balancing the benefits of leasing and buying against your firm’s current and future space requirements.
Then ask yourself the most important question: What does your business need?
How to reach: David Browning, CB Richard Ellis, (216) 687-1800; Thomas Gustafson, Colliers International, (216) 861-7200
Dustin S. Klein ([email protected]) is editor of SBN.
