Own Versus Lease: When Does Owning Make Sense?
Nashville?s current economic climate is prompting many business owners to examine the option of property ownership. Interest rates are the lowest they have been in years and many are looking for ways to take advantage of the rates before the economy starts to improve. Deciding whether to purchase or lease property can be very challenging; there are many interrelated factors aside from the obvious financial considerations that should be analyzed carefully. Unfortunately, there is no simple answer to the question of lease vs. own. Space costs represent significant business expenses, but making a prudent decision goes far beyond short-term financial considerations. It is a broad process that should include a careful examination of the following factors:
- Merits of Owning and Leasing
- Company Structure / Goals and Objectives
- Operating Space Requirements
- Market Conditions
- Financial Analysis
The Merits of Ownership and Leasing
It is important that a company starts the own versus lease discussion by understanding the basic factors that contrast ownership and leasing. The pros and cons of ownership and leasing include:
Owning Commercial Real Estate Advantages:
- No exposure to market rent increases.
- Property appreciation.
- Rental income from tenants.
- Financial leverage (equity, mortgage loans, etc).
- Tax benefits (favorable capital gains treatment, depreciation, interest).
- Control over image.
- Promotes an image of strength and stability.
- Stability of location.
- Ability to control operating expenses and maintenance.
- Control over other tenants and uses in the building.
Owning Commercial Real Estate Disadvantages:
- Cash outlay includes down payment, closing costs, various fees.
- Possibility of property value depreciation.
- Obsolescence.
- Must concentrate on property management as well as core business.
- Capitalization rate volatility.
- Space or equipment intensive or specialized users may be too expensive to ever move.
- Non-liquid asset.
- Reduced flexibility to expand/contract.
- Uses up borrowing capacity.
- Increases balance sheet debt.
Leasing Commercial Real Estate Advantages:
- Initial cash outlay tends to be lower than owning.
- Rental payments are 100% tax deductible.
- Less capital commitment can channel financial resources into operations.
- Less debt on balance sheet.
- Stability of cash flow.
- Stability of costs.
- Remove ownership risks (obsolescence, loss on disposition, cap rate vitality).
- Maintain operating flexibility (size and location).
- Focus on core business rather than property management.
- Possible option to own at the end of the lease.
- Landlord responsible for property management and most maintenance items.
Leasing Commercial Real Estate Disadvantages:
- Renting can cost more than owning.
- No tax savings from depreciation or interest.
- Less control of asset ? tenants have less input on the image and appearance of buildings.
- No benefit from value appreciation and equity buildup.
- Rental rate increases.
- Less control over operating expenses.
Utilizing a Real Estate Expert
After your company has a strong grasp of the risks involved with both owning and leasing commercial property a tough look at other factors such as company structure / goals and objectives, operating space requirements, market conditions, and a thorough financial analysis should ensue. A real estate expert familiar market conditions and investment analysis is a great place to start when considering taking the plunge into ownership or reassessing your objectives with your current lease. A quick consultation is an easy way to gain insight into the more complex driving factors that determine whether your business should own or lease space in the metro Nashville area. If you are on the fence on the best way and time to begin this process or just want more information on the different methods to getting started then Contact Me Today. I can help your business to develop a strategy for your future real estate needs.
Source: http://elizabethgatlin.com/money-matters/when-does-owning-commercial-real-estate-make-sense/
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