Decisions, Decisions Many Factors Determine Whether It’s Best to Lease or Buy Space

Buy or lease? When it comes to commercial property, this is a question almost every health care-related business will face. And, as with any decision, business owners should look at the pros and cons of each option.

There is no one answer to this question, and the resolution varies with the circumstances of each individual case. However, there are certainly criteria to help you decide.

There are even ’buy vs. lease’ software programs that can help with the analysis of this decision. These programs look at a number of factors, including purchase price, appreciation, insurance, interest, taxes, and rent cost and compares them to each other. These programs give you the present values of what the future costs are going to be.

With the details of each decision, the business owner can come up with multiple analyses that show an optimistic, realistic, and pessimistic view of each scenario. These analyses can provide relatively accurate numbers to help the business owner or manager make the appropriate decision.

You will need to analyze a number of factors that are not all addressed by these programs. These include:

• Cash Outlay. Oftentimes, when a business is considering the purchase of a building, it must provide an initial cash outlay of 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 20{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the purchase price (depending on the lender and credit), plus closing costs. When the business leases office space, it doesn’t need to put down nearly as much. Most often, the only up-front costs are the first and last months’ rent. Usually this amount is a small fraction of the cash outlay of purchasing a building, and since cash flow can be a concern for new businesses, this can be an appealing option.
• Opportunity Cost. The opportunity cost of a significant cash outlay should also be considered. Could the money that is tied up in a building be better invested in the business or other opportunities?
• Long-term Cost. When a business purchases property, the long-term cost of a fixed mortgage can be predicted up front. When it rents, the monthly cost could change over time due to market fluctuation.
• Growth Considerations. Where is the business in its growth phase? If the business is new or expanding, leasing may be the way to go. In addition to costing less up front, a lease also provides flexibility for expansion. If the business is well-established and stable, then investing in real estate may be a good way to meet its needs while building equity.
• Responsibilities of Ownership. If the business owns the property, then it is responsible for the upkeep and management of the property. It will have to spend time on these activities or pay someone to do it. If it leases space, then the landlord or property-management company is often responsible for upkeep.
• A Good Investment? Owning property when the market is on an up cycle is always nice. The business benefits from the appreciation of the property and as an asset that gains value. Recently, however, the real-estate market has produced an unfavorable appreciation rate. If the business has the funds, this could be a good time to acquire property at a good price.

Another advantage is that the property can be a source of financing; banks are more likely to lend to a business that utilizes its property as collateral. This is almost always more effective than utilizing equipment or machinery as collateral, for example.

• Taxes. Lease payments are fully deductible as a tax deduction for the business. When a business owns a building, the interest cost on the mortgage is fully deductible. It can also take yearly depreciation on the building as a tax deduction. Commercial real estate is depreciated over 39 years for tax, so there is a longer time to recoup the initial building cost.

The good news is that any improvements or work done to the building can be depreciated over a shorter life span.

• Other Factors. If the business is leasing property and decides to move to a new location, then it doesn’t have to worry about selling the property that it already owns if the lease hasn’t expired. Usually the business could sublet some of the space if it is not needed by the business. The improvements that a business adds to the rented space are usually lost once the lease is up.

Meanwhile, if a landlord decides not to renew when the lease expires, the business will have to move. If you own the property, the possibility of subletting exists. The business can stay at the location as long as it pleases. The property is an asset that has value and can be sold.

As you can see, there are many factors involved in choosing whether to buy or lease. However, the decision is ultimately up to you. Best practices suggest gathering as much information as possible and seeking the advice of professionals who deal with these transactions on a regular basis.

Armed with knowledge and professional guidance, your business will have the resources it needs to make the best-possible decision.

Sean Wandrei is a manager in the Tax Division of Holyoke-based Meyers Brothers Kalicka, P.C., a certified public accounting firm.