In commercial real estate, businesses face a critical decision: to own or lease their property. Each option has its own advantages and disadvantages, influenced by factors like financial goals, long-term plans, and operational flexibility. Understanding these pros and cons is crucial for making an informed choice that aligns with your business strategy.
The Pros of Owning Commercial Real Estate
Flexibility
The flexibility of ownership is undervalued by most prospective tenants and prospective owners. The ability to sell the property if, say, business plans change is welcomed flexibility versus trying to terminate a lease early.
Equity Building
One of the most significant advantages of owning commercial property is the ability to build equity. Over time, as you pay down the mortgage, you increase your ownership stake in the property. Commercial properties can appreciate over time, potentially providing a substantial return on investment if you decide to sell. This appreciation can be a significant financial boon, especially in high-growth areas.
Fixed Costs
Owning property means having predictable costs. Unlike leasing, where lease terms and rental rates can fluctuate, owning allows for stable monthly payments, assuming you have a fixed-rate mortgage. This stability can be beneficial for long-term financial planning.
Tax Benefits
Property ownership comes with several tax advantages. You can deduct mortgage interest, property taxes, and depreciation from your taxable income, which can significantly reduce your overall tax liability.
Control Over the Property
When you own, you have full control over the property. This means you can customize and renovate the space to suit your business needs without needing approval from a landlord. This control can be critical for businesses with specific operational requirements.
The Cons of Owning Commercial Real Estate
Opportunities are Hard to Come By: In Charlotte especially, there are a limited number of properties available for purchase, making ownership hard (and expensive) to achieve.
High Initial Costs
Purchasing commercial property requires a significant upfront investment. Typically, purchasing vs. leasing comes down to capital allocation. Most small to medium-sized businesses choose to invest in growing their business versus purchasing property.
A good way to frame this is to ask: “Do the business owners/shareholders expect a return on capital from the business or the real estate?” In other words, in most cases, investing in real estate should be left to professional property owners/landlords.
Ongoing Maintenance
As an owner, you are responsible for all maintenance and repairs. This responsibility can be costly and time-consuming, particularly for older properties requiring frequent upkeep.
Market Risk
Real estate markets can be volatile. Economic downturns or changes in the local market can negatively impact property values, potentially resulting in a loss if you need to sell during a downturn.
The Pros of Leasing Commercial Real Estate
Lower Initial Costs
Leasing typically requires less capital when compared to purchasing. Upfront costs usually include a security deposit and possibly the first and last month’s rent, which is more manageable than a large down payment Less capital in real estate and more in the business is usually a good thing for small to medium-sized businesses.
Less Responsibility
Maintenance and repairs are generally the landlord’s responsibility. This can save you both time and money, allowing you to focus more on running your business.
Tax Deductions
Lease payments are typically fully deductible as a business expense, providing a straightforward way to reduce your taxable income.
The Cons of Leasing Commercial Real Estate
Flexibility
Duration matching is the art & science of matching your business needs with your property needs and is often difficult for most SMBs. Business owners are often tempted by lower lease rates associated with longer-term leases. Longer lease terms may not be ideal and can lead to significant financial hangovers if the business grows (or contracts) and the business needs to sublet or attempt to terminate the lease.
No Equity Building
Lease payments do not contribute to building equity. Essentially, you’re paying for the right to use the space without gaining any ownership benefits.
Variable Costs
Different lease structures (NNN, Modified gross, Full-service gross) offer varying degrees of variable costs to tenants. These variable costs can complicate long-term financial planning. Please check out our blog posts on the different types of lease structures for more details.
Lack of Control
Leasing typically means you have limited control over the property. Any significant changes or improvements usually require landlord approval, which can be restrictive.
Potential for Displacement
At the end of a lease, there’s always the risk that the landlord may choose not to renew, forcing you to find a new location and potentially disrupting your business operations.
Deciding whether to own or lease commercial real estate involves careful consideration of your business’s financial health, long-term goals, and operational needs. Weighing these pros and cons against your specific circumstances will help you make the best decision for your business.
No matter which route you opt for, it’s imperative to work with a commercial real estate advisor who has your back and works for the best deal for you. We have this experience and client-centered focus. Call us at 704.219.0908, email Barrett@FowlerPropertyAdvisors.com, or contact us using the button below.
LEAVE A COMMENT
Comments