Small Business Real Estate – Ownership vs. Leasing

Many small business owners struggle with the decision whether to buy or lease real estate for their business operations. Real estate values have been softened by the economy, making right now one of the best times to evaluate the pros and cons of small business real estate ownership. Following are some of the major considerations in making that decision.

Pros:

• An owner can accumulate equity with long-term real estate ownership through paying down the mortgage and experiencing market appreciation in the value.
• A landlord cannot dictate rent increases or uses of the property. The property owner can lock in a fixed overhead cost for their facility.
• Excess space may be used to produce incremental income from rent.
• There may be significant income tax savings from depreciation.
• Financing options are more numerous for real estate than for other capital assets.
• The business owner can establish a separate real estate holding company to own the real estate asset.
• When the business is closed or sold for retirement, the real estate asset will retain important, appreciated value and rental income potential in a separate holding company.

Cons:

• Being tied to a facility with limited space and a specific location may not be the best strategy for a rapidly growing company.
• A down payment is required to finance a building purchase. A business that is still in its early stages of development, may not want to sacrifice cash which can be used for growing the business.
• A property owner must be ready to take on responsibilities for maintenance, security, remodeling, and other management issues.
• For an owner who is growing his business in order to sell it, cash used to buy a building may not be its best use. Since businesses are bought and sold based on cash flow, the value created by the cash flow may far exceed the likely appreciation of the real estate during that time frame.
• Personal guarantees are required for most small business property mortgages.

As with any major small business investment decision, the prudent business owner should consult with his accountant and his attorney to help weigh the pros cons in making that decision. To reach a decision, the business owner needs a good understanding of real estate value versus business value, as well as a formula for comparing the financial and legal aspects of leasing to those of owning a business property.

Finally, there is only upside to having a qualified commercial real estate expert protect the interest of the buyer (or Lessee). These benefits may include full coverage of the commercial real estate opportunities in the small business’ market, a needs analysis, identifying opportunities and scheduling tours, protection from common real estate buying errors, managing the transaction among all parties involved, and savings of time and effort through their professional expertise.