Many small businesses have trouble deciding whether to lease or buy commercial real estate. While financial aspects play a major role in this decision, money is not the only factor--there are pros and cons for both sides. Keep in mind that there are many intangibles not mentioned here and your real estate professional, accountant, banker and tax specialist are all resources to help you make the best decision for your business.
When looking at leasing space consider these points:
Financial Implications- Leasing typically requires less cash out of pocket including for a down payment. By leasing, you leave more capital to invest in your business operations. Leasing can also be viewed as a source of financing when the cost of leasing is less than the cost of ownership. The type of lease will be the biggest factor in determining this value for you and your business.
Tax Benefits- Unlike in ownership, the occupancy costs of leasing are deductible, whereas an owner is required to depreciate the property’s improvement costs, and cannot depreciate the value of the land itself. This benefit can help to shield the business' operating income from federal, state and local income taxes. Check with a tax specialist such as a CPA for specific information on leasing tax benefits.
Flexibility- Leasing allows the tenant adjust to changes. Your business may become stronger, experience setbacks or your needs may change. Leasing usually allows for a much quicker and often cheaper transition.
Repairs- Again depending on the type of lease, your landlord may be responsible for building repairs. This saves you both time and money.
When looking at purchasing property consider these points:
Financial Implications - When you own your property you own an asset. An owner can take advantage of appreciation, while a tenant cannot. You are also are vulnerable to the value of the property declining.
Tax Benefits- Owners can enjoy the benefits of interest and depreciation deductions. Also upon sale of the property gains are usually taxed at a lower rate than ordinary income.
Save Money Over Time- Although a down payment can be a substantial amount for your business, this can also leading to savings. Your cost of ownership can be lower than with renting and become even less when you pay off your mortgage. Typically when leasing your rent will tend to increase over time.
Inflexibility- Because the property is owned by the business, decisions to relocate or sell can be more time consuming and often more expensive.
Management- When you own a space, you have control over what you do to it. This also means you are responsible for all repairs and maintenance.