High office lease rates tend to make companies consider the pros and cons of leasing vs buying office space. The right decision on this is different for every business, but it is best to weigh your options in hopes of finding the best solution.
For newer companies with high growth potential, leasing office space is often the best route. For more established organizations with a healthy financial base, buying office space can be a very effective investment strategy.
Below are some points that may help you determine if leasing vs buying office space is best for your business:
- Up Front Costs: The Security Deposit of a lease is typically only 1 to 3 months’ worth of rent. Given that you do not cause substantial damage to the space while you occupy, you should expect to receive most, if not all, of your Security Deposit back when your lease expires. When buying office space, you have a large amount of up front expenses to consider. The down payment, earnest money deposit, and other miscellaneous purchasing costs add up quick. These expenses can eat up a lot of a company’s budget. This is often seen as a Pro for leasing office space and a Con for buying office space.
- Build Out Costs: Whether you are leasing office space or buying a commercial property to owner-occupy, you are likely not going to move into the space in its as-is condition. Many commercial leases provided Tenant Improvement Dollars from the Landlord to help build out the space. The Tenant often has to come out of pocket though to make the space exactly how they desire. This improvement to the space is valuable to both the Landlord and Tenant. However, when the Tenant is improving the building, they will lose out on the value of any money that they contributed once they vacate the space. If you own the property that you are improving, you are creating value and hopefully will see the returns on your improvement investments once it comes time for you to sell. This is often see as a Pro for buying office space and a Con for leasing office space.
- Time Commitment: Most office leases are for a term of 3 to 7 years. This offers great flexibility for office user as they grow or come under financial hardship. Many organization have a good idea of where they will be in 3 years but few have any idea of how things will look in a decade or more. When buying commercial real estate for your business to occupy, it has to be viewed as a long term investment. If your business grows quickly you may not have room to expand, and if your business is hurting financially it may take some time to sell the property. Every organization is different, so there is no clear direction on the Pro vs Con for this.
- Operating Expenses: Properties need upkeep, that is the inevitable part of being a property owner. If you are an owner-occupier if a building, all of the operating expense costs for a property are put directly on you. If you are a Tenant, the Landlord will still put the operating expense costs on you. However, you will only be liable for your proportionate share of the operating expenses. All of your neighboring Tenants will pay their proportionate share as well. By being the owner of the property, you have a say on what all gets done and how much you are willing to spend. If you are a tenant of the property, often times you don’t get much say but hopefully you will have audit rights and / or a cap on the controllable items of the operating expenses.
- Payments and Capital: If you are leasing office space, you will have a monthly rent check. The downside of this is that you will never see that money again. If you own the office space that you occupy, you will be building capital with every loan payment you make. Once you pay off the loan, you will have an office for free! (Plus taxes and utilities). However, you will have a lot of capital locked into the building that you could be using for other business expenses.
- Tax Benefits: It is important to consult with your accountant before making an office lease or purchase decision. There are tax benefits for both situations, and a good accountant can help point you in the right direction. In most cases, lease payments are fully deductible for taxes. If you are the owner of commercial real estate, it can be possible to have deductions for depreciation and many of the operating expenses.
- Exit Strategy: What goes up, must come down. We all know it and its a fact of life. To help hedge your bets, you always want to have an exit strategy. This is especially true when it comes to the large financial aspects of your business, such as an office lease or commercial property. The nice thing about an office lease is that it has a set expiration. Once the lease expires, your obligation to it is done. Subleasing your office space is one way to help reduce the overhead of your business if things aren’t going as planned. Some leases even have Termination Options that can get you out of the lease all together. When you own the office space that you occupy, it becomes much harder to exit the situation. Properties take time to sell and there are many fees involved with selling a commercial property. Often the sale of a property is not as “cut and dried” as people would like.
If you are considering leasing vs buying office space in Texas, please contact us with any questions or to further discuss your needs.