In decades past, it was unusual for businesses to own their commercial real estate. The exceptions were doctors and dentists, who often bought small suburban office buildings, or converted their homes or parts of their homes into office space. But in todays market, more and more businesseslaw firms, advertising agencies, and financial planning companies, to name a feware choosing to buy rather than lease their office space.
Why Own Your Commercial Real Estate?
The attractions of owning your office space are obvious: commercial real estate investment can build equity, increasing a companys net worth over the long term, particularly in areas with rapidly appreciating property values. Alternatively, the principals of a business may choose to purchase an office building and lease it back to their own company providing a steady source of rent to offset the loan payments. Owners can also take advantage of tax deductions for mortgage interest and building improvements, as well as special capital gains treatment.
And, for many business owners, the idea of having predictable, fixed payments over the life of a loan rather than the variable costs of fluctuating rents makes great sense. Business owners are no longer subject to office leasing market conditions and rising rental rates, and have complete control over decisions about office remodels, maintenance, and how the office space looks and feels to clients and customers.
So what stops businesses from making the leap from lessee to landlord? One obstacle can be the scarcity of available properties. Nationwide, the number of properties available for purchase is usually dwarfed by the number of spaces available to lease.
The commercial real estate landscape is evolving and new possibilities are opening up. Some regional commercial real estate developers are catering to businesses that prefer to own their real estate. Small office parks with individual buildings each owned by separate businesses have been developed throughout the country. This set up is ideal for insurance agents, dentists, or virtually any small business requiring 4,000 to 8,000 square feet of office space.
Another possibility for companies looking to buy in prime locations is the office condominium option. Office condos are available even in major markets, where often few buildings are up for sale.
Why Lease?
Building ownership is not for every businessmuch depends on a companys current growth phase. Young companies and start-ups may not be able to predict their growth accurately enough to understand their future commercial real estate needs. Office space leasing offers them maximum flexibility to be able to adapt quickly as the company grows or downsizes.
Cash flow is also an issue. Buying real estate requires a down payment and funds for closing costs, which ties up working capital that many businesses are not willing to commit. Young companies may not have acquired the financial assets needed to meet commercial lenders requirements.
For some businesses, leasing office space makes more sense because in general, lease payments are deductible immediately, while the tax advantages of ownership are more complex and only realized over the long term. Keep in mind that it is critical to review any tax-related decisions with an attorney and tax advisor.
Room to Grow
Owning often works best for mature, stable businesses, whose growth curve has leveled out or is easy to forecast. Future growth is an important consideration. If your business expands more than the building can accommodate, you may need to sell and buy something else, a time-consuming process. Or, you may end up leasing the entire building to another company.
To manage this possibility, businesses often purchase space that is larger than their current need and lease the additional space to another company. That way the building owner can expand into the additional office space when their tenants lease expires.
Outgrowing a space doesn't have to be a financial crisisit can even be an opportunity for generating new cash flow. One of my clients saw his business grow so rapidly that he quickly needed more than twice the space of the building he'd purchased. He was able to lease that building to another company at a profit, and move into a new, larger space for his own business.
Add it All Up
If you are on the fence over the buy vs. lease subject, keep in mind that leasing commercial real estate appeals to businesses that are in constant flux and need the ability to make fairly rapid adjustments in their office space; whether it be in the size or type of the space or the location. In addition, if you need to keep your capital liquid for future business investment, it makes more sense to lease. Office building buyers will be stable companies that know they will be in the same location for several years. They will also have significant financial assets and the tolerance for taking on the responsibility of buildioveng maintenance and other ownership issues.
If you think owning your own office space might be an option for your business, do the numbers. Make a long-range plan. Consult your real estate professional, attorney, and tax advisor. Andif you find the perfect propertyact fast!
Visit http://www.moveyouroffice.com for detailed information on managing your next office relocation.
Karen Warner is the author of Move Your Office: The #1 Source for Pulling off Your Best Office Move Ever!, the best-selling office leasing and relocation guide. Move Your Office is available at http://www.moveyouroffice.com and Amazon.com.
Karen Warner's skill and experience as a commercial real estate broker has helped many businesses manage a smooth transition to their new location. Her extensive knowledge of the commercial relocation process and unique talent as a tenant representative allows her to expertly assist clients in finding and negotiating office space. Karens status as the author of three best-selling commercial relocation books gives her the tools and savvy to formulate effective moving strategies.
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