A Landlord Too? Buying vs. Leasing Office Space
by SmartSamantha and Bo Keatley
Over the past few months, this question has been asked by several of my entrepreneur friends: Should I lease or buy my office space?
So, I decided to ask my expert commercial real estate friend, Bo Keatley of NAI Brannen Goodard, in Atlanta to answer this question.
Bo explained:
In determining whether to buy or lease office space, you need to consider several key factors:
- Are you planning to grow?
- Can you put down at least 20%?
- Do you have a capital reserve for improvements?
- Are you okay with being a landlord?
If you are planning to grow your company, or think your business may decrease in size, leasing is a safer bet. In a lease you have more flexibility to expand and are less committed to the property. If you own your space/building and outgrow it, you could lease out to another company and buy something else. However, in this scenario, you run the risk of not finding a tenant – and you also may become a landlord (see below).
In today’s lending climate, banks are looking for at least 20% down on commercial property loans. If you can’t afford that down payment, you shouldn’t look at an acquisition. However, if you do have the capital to put down (and don’t want to invest it back into your business), a commercial property purchase could be a good opportunity for you.
It is important to remember that upon purchasing a building or space, you may have up-front costs to pay for tenant improvements to get space to your specifications or additional capital improvements to upgrade the building or space. This can be a significant cost depending upon the building or space you are considering.
Be sure that you’re prepared to be a landlord. Even if you are the only tenant in the property you acquire, you are still responsible for the land, structure, roof etc. All aspects of property ownership that a landlord is responsible for in a lease agreement are your responsibility as an owner.
Bo summed it up:
Many small businesses consider ownership instead of leasing. However, because of the up-front costs associated with acquiring a property, the responsibility that comes along with ownership, and today’s lending climate, many decide to lease. Not to mention that a lease is often a tax write-off as a business expense (consult your accountant for details).
Ultimately, consult your real estate advisor/broker to help you decide what makes the most sense for you. There are certainly benefits to both a lease and a purchase, depending largely on the type of business you run and your long-term plans.
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