After a few years of success, business owners often consider whether or not they should buy the company's building rather than leasing it. Benefits of owning vary depending on several factors, including the type of business you own and the space you would be purchasing. However, more often than not, owning offers more advantages than leasing.
“Buying commercial real estate is an excellent way for small business owners to create an independent income stream for themselves and accumulate wealth apart from their business operations," said David Cameron, manager of business banking at City National Bank. Sub-leased space can provide you with a secondary, steady income stream unrelated to core business operations.
Many Southern California-based import/export firms, for example, find they can diversify their assets by buying office or industrial property, leasing a majority of the space to their own businesses and the remainder to commercial tenants, said John Wheeling, regional manager of commercial banking at City National.
There are a few factors to consider to determine if purchasing your commercial real estate property would be advantageous. Answer these questions to gain a better understanding of how owning your property could benefit your business.
If your company is growing fast and will need to leapfrog to larger spaces quickly, a lease gives you more flexibility and is probably more cost-effective. One exception, if you can swing it: Buy a bigger space and grow into it while you lease out the extra space in the meantime.
If you don't anticipate needing more space and you plan to stay in your building for five to seven years, buying will almost always be less expensive in the long run, Wheeling said. When a lease expires after a few years it is typically renewed at a much higher rate, while a mortgage rate is locked in over the life of the loan.
A mortgage payment could also be comparable to a lease payment – meaning you're not saving much (if any) money each month by leasing.
Buying ties up more of your money, so if you need liquidity a lease might be best.
Your financing options include conventional loans that typically require 25 percent down, and SBA 504 loans that let you buy with 10 percent down and offer below-market interest rates. The lower down payment lets you hold onto more of your capital, but it also means higher costs and fees. Your business banker will help you crunch the numbers and review your financing and business loan options.
Consult an experienced local commercial real estate broker – they know every square foot of building space within their territories and can advise you on the cost of leasing versus buying. Depending on your market, the property may appreciate in value and the equity accumulated can become a nest egg.
If you do decide to buy, it's best to form a real estate holding entity that will own the property. Even if you sell the business or move, you still own the property and maintain the lease income. Your banker and attorney can help you decide how to do this.
“Unless there's a specific reason why you want to lease, you're almost always better off buying," said Wheeling.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
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