There may come a time in the growth cycle of a business when owners have to decide whether to continue to lease office space or purchase an office condo.
There are pros and cons to whatever decision ownership makes. Understanding those pros and cons can help lead you to the right decision for your company.
Initial cash outlay is usually lower when the company leases space. Purchasing an office condo that costs $150,000 could require a cash outlay of a 20% down payment, or $30,000. In some cases, that business capital could be used to grow the business in other ways – new equipment, more staff, increased marketing.
When you purchase an office condo, your loan payments are usually fixed, so you know what it will cost each month for you to occupy the office.
When you lease, your business office expenses are tied to the rental market. In a tight market, one in which the building owner has space in demand, your company may face rent increases – especially on a short-term lease in which the rent is calculated annually, or every three years.
Adding Value to Your Business
When you purchase an office condo, you increase the value of your business because you now own real estate. In other words, you’re not only in your primary business, you’re in the real estate business, as well, as the owner of a business condo. This may add value over time as property values increase. Adding business value also increases the sale price if you plan to sell the business in the future.
If you outgrow your leased office space, you may be able to lease more space in the same office building. However, if you own the space, expanding is more complicated, and may be a lot more expensive.
How quickly is your business growing? When considering the purchase or lease of office space, look to the future to avoid having to move the entire operation into a bigger space 36 months from now. If determining business growth over a few years is difficult, you may be better off leasing your office space until you have a clearer picture of just where your company will be five years from now.
Tax Advantages or Disadvantages
If you lease office space, rent is routinely deductable as a business expense in the year the expense is incurred, i.e., you can deduct office rent each year.
Buying an office condo allows you to depreciate the value of the property over 39 years. In this case, you may not have as big a deduction as a commercial property owner as you’d have as a business property renter – at least year to year. Consult your CPA or tax advisor to see how this would pencil out for you.
Considerations before Buying a Business Condo
Here are some basic questions to ask before signing that purchase agreement for a business condo:
How stable are company revenues? Can you depend on revenues remaining steady, or growing in the years ahead? Do you have a stable base of clients who require repeat services? Can you predict, with some certainty, your company’s growth rate?
If revenues are growing, chances are, so is your business. If you aren’t sure how quickly your company will grow, you may be stuck with an obsolete office that’s too cramped. Track revenues over a period of time to identify trends and help predict future growth.
Is financing available? Start-ups and companies with a short history may have difficulty securing financing to purchase a business condo, no matter how good the balance sheet looks. Talk to the commercial loan officer at your bank to learn what financing options are available, and what the lender may require to secure a mortgage on an office condo.*
Would you put up personal assets as security? A lender may require collateral to support a commercial business loan. That collateral may come in the form of a second mortgage on your home, or some other collateral from your personal asset portfolio. Putting up personal assets may secure a commercial loan, but are you willing to bet the farm on your business? Under what terms? What’s your tolerance for risk?
What are the real costs of owning versus leasing? Before you buy or lease, perform a detailed cost analysis using a variety of scenarios – including a worst-case scenario.
Lease your space now? Okay, what would your company do if the rent increased 30% when your current lease runs out? Would you have to move? What would that cost?
Work with your business accountant, legal counsel and commercial bank to develop an accurate cost analysis of leasing versus owning the company office space.
Should you work with a commercial real estate professional? In most cases, it’s a good idea. These business “space” professionals know the market. They know what space is available and how to negotiate a lease or a purchase, and they can advise on cost-per-square-foot comparisons. In other words, a commercial real estate professional can provide the advice you need to “test the market” before making a decision to keep leasing or to purchase your next office space.
Each company is different, with different needs and different objectives. Whether to buy or lease your company office space depends on a number of factors – factors that should be evaluated with the help of professionals.
Before you make a move, get the input you need to make the right decision regarding your business space.
*For information about SBA financing for your commercial space, contact Nevada State Bank at 1-866-553-2760 or visit www.nsbank.com/sbainterestonly/index.jsp.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.