It’s the age old questions for business owners: Should I lease space for my business or should I buy something to call it my own? There are definitely benefits to ownership, such as depreciation and pride of ownership, and many businesses thrive in owning their own real estate. However, more times than not it is beneficial to lease. I can tell you 5 things to consider before making a real estate purchase:
1. THE ABILITY TO REINVEST YOUR PROFITS This is pretty cut and dry. As a tenant you can take your company’s profits and reinvest them to grow your business. Or, in good years, you even get to put some of it into your pocket. As a building owner, this money most likely will go towards repairs and maintenance of your facility. And those repairs seem to add up pretty quickly. Mechanical, roof, and parking systems can be expensive to repair but a necessity to maintaining the building’s value.
2. IT WILL COST YOU MORE FOR REPAIRS AND MAINTENANCE THAN ME And I can get them done quicker, too. This is that pesky law of the economies of scale. Maybe you print more brochures than I do. Naturally, your cost will be lower than mine. Due to the fact that I am a landlord and I repair and maintain commercial facilities all year long, my costs will be lower than yours.
3. FINDING TENANTS If you own a facility and occupy a part of it, you are left with some empty space to fill. Chances are that you need the additional income. Depending on the market, it may or may not be difficult to find tenants. Markets fluctuate, and it takes time and resources to secure tenants. And in a market like today, you are competing with a lot of other building owners, and may not get the income you had anticipated.
4. STRUCTURAL RESERVE This goes hand in hand with repairs and maintenance. It is often required by your lender that you put aside money for structural reserve and if not required you should do it anyway. This is calculated as a percent of the net operating income and used for larger, capital expenses such as roof replacement and parking lot work, items that the landlord is typically responsible for. Again, you are left with putting a portion or more of your company’s profits towards your real estate expenses, instead of reinvesting it into your business.
5. BUILDING MANAGEMENT This can be a full time job in and of itself, let alone simultaneously running a business. Fielding tenant calls, doing the accounting, collecting rent, handling that leaky roof and the toilet that won’t flush will all become a part of your daily life. Be prepared to take on a lot of additional responsibilities.
Depending on your goals, building ownership may or not be for you. Consider it carefully when making your decision to own vs. lease commercial real estate.
~Suzanne Broadbent, Weston Inc.
