31 Jul 2018
One of the trickier decisions many entrepreneurs face is choosing between buying or leasing their place of business.
There are advantages and disadvantages to both options, and the decision requires lots of analysis and planning. Here are some considerations to help you understand what you’re getting into with each option. Weighing them effectively will help you navigate this delicate decision to your business’s best advantage.
When should I buy?
If location is important to you
A great location is hard to find. If you have found one that helps you grow sales through foot traffic and ease of transportation, reduce costs through proximity to key suppliers, and/or attract and retain employees, you may want to secure that space by purchasing it.
If you want to build your personal wealth
Commercial real estate has been a great investment for many entrepreneurs in recent years. While there are no guarantees, owning can build wealth apart from your operating company.
If your current leasehold improvements are getting costly
If you’re investing heavily in a building to run your business, it often makes sense to buy a property. If, however, the time isn’t yet right to buy, you may want to consider leasehold improvement loans to tide you over.
If you want to be free of landlord woes
If running every aspect of your business without potential limits, restrictions and rent increases is important to you, then you might want to buy a commercial space.
If you need to free up working capital
A well-financed property purchase can free up working capital by reducing your monthly outlay for rent. The difference can be used to build your business. “It’s about balancing growth with cash flow,” says Jean-Philippe Ménard, Vice President, North Shore at BDC. “We often finance those kinds of purchases because we want to make sure our clients will have enough working capital to grow.”
If you decide to buy commercial real estate, be sure to pay close attention to the following.
Rising interest rates
Low interest rates have encouraged many entrepreneurs to buy in recent years, and they have enjoyed considerable market appreciation. However, “there’s a wake-up call coming” for some entrepreneurs in the form of rising interest rates, says Ménard, who works in BDC’s office in Laval, Quebec. He notes that many younger businesspeople have never experienced the rising costs that come with higher rates.
Cash flow and stability
Before you buy, make sure your company will have the resources to support this commitment in the years to come. Buying a building, after all, is a long-term investment.
Protection and due diligence
Be sure to protect yourself from problems that can come with ownership, such as hidden building defects or environmental contamination. Get a building condition inspection (BCA) and an environmental assessment (ESA), or hire a qualified environmental consulting firm to assess the property before you purchase. Before buying, it’s equally important to get a lawyer to perform thorough due diligence on such issues as land title, zoning, outstanding taxes, liens, easements and other potential problems with the property.
When should I lease?
Here are some situations where it may make more sense to rent a space for your business.
If you don’t have enough working capital
Start-ups are often unable to commit a lot of capital to a building, so they will most likely opt to lease. Even if you have an established business, it may not be generating enough cash at this stage to allow you to fund both your growth and your commercial property acquisition.
If your business needs are unstable
If your company is growing rapidly or downsizing, or you’re just not sure what’s going to happen, you might be better off renting until the situation stabilizes.
You don’t want the hassle of owning
Owning a property comes with additional responsibility and potential problems. You may prefer to rent and focus on your business for the time being.
If you decide to lease, be sure to pay close attention to the following.
Option to renew
While some entrepreneurs may not want to make a long-term commitment to a location, Ménard cautions that flexibility can work both ways. A landlord can refuse to renew a lease once it expires. That forces your business to relocate, with all the costs associated with doing so.
Renovations and improvements
Be sure to find out about restrictions that could limit your ability to expand or use the space in different ways. Specifically, find out whether there are any limitations on making changes to your space. Do you have to return the property to its original condition when you leave? Do added equipment and fixtures remain your property, or do they become the property of the owner?
Are there enough parking spaces for all tenants and their visitors? Are you guaranteed spaces?
What are your rights when it comes to signage?
It’s important to understand what your landlord does and doesn’t pay for before committing to a commercial lease. Specifically, pay close attention to the following.
Common area maintenance
Who is responsible for cleaning, repairs and other costs associated with common areas, such as washrooms, entrances, general reception areas and the parking lot? Who pays for snow removal, grass cutting and/or landscaping?
Who pays for property taxes, insurance, utilities, security, and the repair or replacement of equipment such as heating, ventilation and air conditioning units?
In the end, whether you decide to buy or lease a commercial space, remember the following.
You’re not alone
As part of your trusted team of commercial real estate advisors, a lawyer specializing in commercial real estate should review your contract carefully with you to avoid any unpleasant surprises down the line. Getting familiar with these terms may also help you focus on aspects of your contract that are particularly relevant to your business needs.
Plan for cost overruns
Whether buying or leasing, many entrepreneurs are surprised by how much it costs to move their operations to a new location. In addition to direct moving costs, there are also expenses to prepare and furnish the space, do renovations, and purchase new machinery and equipment. If you are constructing a building or expanding, you will also have design and construction costs. Make sure you’ve taken these additional costs into account as part of your overall commercial real estate budget, which should also include a generous contingency fund. Be sure to discuss these issues with your banker and get additional financing, if necessary.
Plan for business disruption
Another important issue that often comes up before, during and after the move, is the loss of productivity and sales. Many entrepreneurs don’t realize how much of their attention a move is going to demand. Make sure you have a plan to help you manage transition and change effectively when moving into your new commercial space.