You Own the Business, Should you Own the Space?
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Both individuals and businesses are faced with the choice of whether to lease or whether to purchase property. Many of the same considerations apply whether the property is an automobile, a personal residence or an office condo or building. These considerations need to be weighed by the individual or company to determine which is the right decision for you.
The following are just a few of the considerations to weigh which are set out using the example of a purchase versus a lease of an office condo or building:
· Cash Outlay. Typically, if you are planning to purchase office space, you can expect to make a down payment of up to 25 % of the purchase price, depending on the lender and your credit. When you lease office space, you won’t need to put down nearly as much. With good credit, the typical outlay is the first and last month’s rent which is only about 10% to 15 % of the cash outlay required when purchasing office space.
· Opportunity cost. With a large outlay of cash required to purchase office space, the opportunity cost of that money needs to be taken into consideration. You need to compare the return would you expect to receive on that money invested in the office space to the return you would expect to receive if the money were invested in your business or other investments.
· Fixed vs. variable cost. When you purchase office space, you have fixed your cost as you will be paying a monthly mortgage amount. If, on the other hand, you decide to lease, your lease cost may go up depending on the market conditions.
· Growth considerations. If your company is in a high growth mode, purchasing property may be the wrong choice, as you cannot determine what amount of space that you may ultimately need. Many businesses, even in the growth mode, will buy more office space than they need at the time and lease a portion of it to
another business until they ultimately are ready to use it.
· Property management. Of course, if you own a property, you will need to maintain it, which will require your time or someone that you hire. This is not the case if you lease the office space.
· Appreciation. One of the primary reasons for purchasing office space is to obtain long term appreciation. When there is a good healthy real estate market, this is a strong factor in your decision.
· Tax factors. Lease payments are usually fully deductible, while on a purchase, you will be able to deduct the interest costs and depreciate the building cost over a longer time frame. It is a good idea to consult your attorney and tax professional about the legal and financial considerations in owning office space.
· Cash flow analysis. It is a good idea to do a cash flow analysis of the purchasing versus leasing decision, which will take into account your predictions on your holding period, anticipated appreciation, rental increases, interest rates and the costs of maintenance on the property.
The decision to buy or lease property is not a “one size fits all” type of decision. It requires you to analyze all of the above factors to reach a conclusion that is right for you.
ABOUT THE AUTHOR: Denice A. Gierach
Denice A. Gierach is a lawyer and owner of The Gierach Law Firm in Naperville. She is a certified public accountant and has a master in management.
Copyright The Gierach Law Firm
More information about The Gierach Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
· Cash Outlay. Typically, if you are planning to purchase office space, you can expect to make a down payment of up to 25 % of the purchase price, depending on the lender and your credit. When you lease office space, you won’t need to put down nearly as much. With good credit, the typical outlay is the first and last month’s rent which is only about 10% to 15 % of the cash outlay required when purchasing office space.
· Opportunity cost. With a large outlay of cash required to purchase office space, the opportunity cost of that money needs to be taken into consideration. You need to compare the return would you expect to receive on that money invested in the office space to the return you would expect to receive if the money were invested in your business or other investments.
· Fixed vs. variable cost. When you purchase office space, you have fixed your cost as you will be paying a monthly mortgage amount. If, on the other hand, you decide to lease, your lease cost may go up depending on the market conditions.
· Growth considerations. If your company is in a high growth mode, purchasing property may be the wrong choice, as you cannot determine what amount of space that you may ultimately need. Many businesses, even in the growth mode, will buy more office space than they need at the time and lease a portion of it to
another business until they ultimately are ready to use it.
· Property management. Of course, if you own a property, you will need to maintain it, which will require your time or someone that you hire. This is not the case if you lease the office space.
· Appreciation. One of the primary reasons for purchasing office space is to obtain long term appreciation. When there is a good healthy real estate market, this is a strong factor in your decision.
· Tax factors. Lease payments are usually fully deductible, while on a purchase, you will be able to deduct the interest costs and depreciate the building cost over a longer time frame. It is a good idea to consult your attorney and tax professional about the legal and financial considerations in owning office space.
· Cash flow analysis. It is a good idea to do a cash flow analysis of the purchasing versus leasing decision, which will take into account your predictions on your holding period, anticipated appreciation, rental increases, interest rates and the costs of maintenance on the property.
The decision to buy or lease property is not a “one size fits all” type of decision. It requires you to analyze all of the above factors to reach a conclusion that is right for you.
ABOUT THE AUTHOR: Denice A. Gierach
Denice A. Gierach is a lawyer and owner of The Gierach Law Firm in Naperville. She is a certified public accountant and has a master in management.
Copyright The Gierach Law Firm
More information about The Gierach Law Firm
View all articles published by The Gierach Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
