Uncategorized

Lease vs Own

By October 1, 2011 January 30th, 2015 No Comments

To Lease or To Own – That is the question

 

With so many opportunities in the market it can seem confusing – Leasing vs. owning.  Many business owners are faced with the decision to continue leasing space or purchasing a property suitable for their needs.  Lease rates are low, but properties in some cases are also selling for fifty cents on the dollar.  There are several factors that should be considered when making this decision.

 

  1.  Available Cash – Depending on the type of loan selected, an individual looking to purchase Commercial Real Estate can expect a down payment of 10% to 25% of the purchase price.  It is very typical to see individuals select an SBA loan if their business plans on occupying 51% of the property.  An SBA loan can, in most cases, get an owner in with a minimal down payment and a very favorable interest rate.

 

  1. Future Business Growth – Certain business models might call for multiple locations and the risk of owning and allocating a great deal of cash towards down payments might be outweighed by the flexibility and mobility a lease provides.  In addition to multiple locations, business owners might run into a situation where they outgrow their current location.  If an owner owns a building that becomes obsolete for their needs and they need to lease additional space or purchase an additional building, the costs could be higher in the long run.

 

  1. Costs – The stability that owning provides can help one predict future costs.  Leasing provides for an unstable cost structure.  Lease rates will change with the market and can be impacted by a variety of factors out of the control of the lessee.

 

  1. Tax Benefits – One should really talk to their accountant regarding the tax benefits of leasing vs. owning, but it is known that there can be benefits seen with both scenarios.  It is best to weigh the benefits of both scenarios while taking in consideration your business model.  For example a property owner can take advantage of depreciation on improvements completed over time and one can also write off any interest payments. This write off could exceed the costs of leasing.

 

In the South Metro Denver market we have seen many individuals exercising leasing options as well as purchases.  Many small business owners currently working from their home feel that it is a good time to expand to a commercial property through a lease.  While others in existing leases are now looking to lock in payments by taking advance of low interest rates and secure financing to purchase a property.  Depending on the business and the factors discussed above each business can find the best option for their future.

 

Evaluating the two options can be overwhelming; therefore, we encourage business owners to seek advice from a knowledgeable real estate broker, a commercial lender and their CPA, to review the options together.   The real estate broker will compare purchase prices vs. lease rates.  With the right information, this decision can have a positive impact on the future of the business.    Below is a very basic lease vs. own analysis for a 2,000SF building:

Lease Rate =                      $15/SF/YR NNN                                Or           $2500/mo

Purchase Price =              $175/SF                                Or           $2055.31/mo with an SBA 504 loan

 

SBA 504 Loan Proposal
Purchase Price

$350,000

Equity Injection

$35,000

Loan Amount

$315,000

1st Mortgage  (50%)

$175,000

Amortization

25 years

Interest Rate  Fixed for 3 years

6.25%

Loan Payment

$1,154.42

SBA 2nd Mortgage (40%)

$140,000

Amortization

20 years

Interest Rate  Fixed for 20 years

4.70%

Loan Payment

$900.89

Total Loan Payments

$2,055.31

Based on current market rates