The location of your small business is an important factor in whether it succeeds or fails. A few factors to consider are accessibility to customers, vendors, proximity to competitors, and zoning restrictions. Once you have determined the best location, the next question is whether to lease or buy your commercial space.
What makes financial sense for your business?
Buying a commercial property usually requires a substantial down payment—from 10% to 40% of its value. However, if your business is already successful, and you have enough cash to make the down payment and several months of mortgage payments, purchasing a commercial space may be a good choice. It enables your business to benefit from the property’s appreciation, particularly if you are in an area where property values are rapidly rising. In addition, if the commercial space is larger than your business needs for its own operations, you can gain additional income by renting out part of the space to another business.
However, if your business is new, or if you are short of cash, leasing may be a better option. To start, less of your cash will be tied up in the property. Next, there are usually fewer unexpected maintenance costs and a lower risk of unforeseen expenses. Moreover, because rental payments are generally the same every month during the lease term, there is more certainty in budgeting. This will enable you to channel your cash back into your business, focusing on its growth. However, there is sometimes a clause allowing the landlord to increase the rent at certain intervals by a certain percentage.
Unfortunately, monthly lease payments are likely to be higher than a mortgage on the same or similar property. This is because rent often includes insurance, taxes, utilities, and maintenance costs. Additionally, you will not be able to make additional income by renting excess space to another business owner.
What degree of flexibility do you need?
If your business is growing or declining, a lease may provide you with the freedom to move to a different size space after the lease term ends. Including a clause allowing you to sublet or assign your lease gives more flexibility if you ever need to move or if you need to sell your company prior to the lease expiration. In addition, it may be easier to qualify for a lease than for a mortgage on commercial space. This may expand the scope of available commercial spaces from which you can choose. By renting a property, you may be able to afford a space in a more desirable location which would have been too expensive to purchase.
However, if you anticipate that your business will remain in the same location for at least seven to ten years, have equipment that is difficult to move, or will be making substantial renovations to the leased property, buying may be more advantageous. Under these circumstances, if you cannot afford to buy a commercial property, you could negotiate a lease with a longer term to enable you to recoup the amounts you plan to invest there.
How much control over the property do you want?
When you are leasing a property, you must negotiate with the landlord if you want to change the space. In addition, when the lease expires, the landlord is free to increase the rent. Also, depending upon the lease terms, you may have to continue to make payments even if your company goes under (unless there is an early termination clause).If you own the property, you are free to make changes—as long as they comply with local regulations.
Note: A lease agreement with an option to purchase may be a great choice for some business owners. This type of agreement provides a lessee with the option to buy the property after a certain time period. A portion of the monthly rent is credited toward the eventual purchase price. It gives the business owner additional time to save up to buy it or to improve the business’s credit rating. Depending upon the terms of the agreement, there could be some tax implications accompanying an option to purchase.
We Can Help
Choosing whether to lease or purchase a commercial space for your small business will depend upon your unique circumstances. We can provide guidance about each option, and ensure that your lease or purchase agreement includes all of the terms needed to protect your business. Please call our office today to set up a meeting.