8.16.19

The decision to buy or lease commercial property

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Business man putting keys into the hand of a woman wearing a red shirt

Business owners must weigh the pros and cons of buying vs. leasing a property.

Whether your business requires an office, a warehouse, retail space or a combination of all three, one of the biggest decisions is choosing whether to buy or lease commercial space. Here are five factors to keep in mind when making this important decision.

Cash flow

Upfront costs will be lower with a lease than with a purchase because you don’t need 10% (or more) of the purchase price needed for a down payment. Typically, a lease only requires a security deposit and the first month’s rent.

Over the long term, however, you may spend more with a lease than if you purchased a property. That’s because a landlord will factor taxes, maintenance and profit into the lease payment.

Control

When you lease, a landlord may limit what kind of improvements and modifications you can make, inside and out. At the very least you’ll need their permission to make changes. If there are changes to be made, make sure your lease clarifies who pays for them and who owns them at lease-end.

If you own the property, you’re in control. You can modify the space any way that suits your business needs. (You will still have to abide by zoning rules, though.)

Also consider that a landlord can decide to increase the rent or sell the property to a new owner who has different goals for the property’s use. Both situations could put you in a difficult position.

With a purchase, your monthly payments remain constant and you know that your business can stay put.

Taxes

There are tax benefits to both leasing and purchasing commercial property. Lease payments are a tax deductible business expense; payments for loan principal are not. However, with a commercial property purchase, you can take deductions for depreciation and interest expenses.

Talk to a tax professional to see how each scenario plays out for your business.

Flexibility

One advantage to leasing is flexibility. You can start out in a small space and move to a larger one as your business grows. Leasing can also allow you to operate from a desirable location where the purchase price of real estate is high.

If you purchase a property, be sure to consider your long-term needs in addition to your immediate space needs. Will the new place support your business in five or even 10 years? If you buy a property with more space than you need immediately, could you lease the unused space until you do need it? Leasing part of the space can help finance your purchase.

Terms

Whether you lease or buy commercial property, make sure you understand all associated costs and contract terms.

Negotiate everything up front and get it in writing before you sign the paperwork.

When you review the lease or purchase contract, make sure everything is spelled out exactly as negotiated. Due diligence now will avoid hassles in the future.

Do you have business banking questions? Contact our knowledgeable business development managers or call 800-991-2221. We’re here to help you grow your business!

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