Business Article - Should you Lease or Buy Premises
As a business owner or future business owner it is imperative that details of property are researched with respect to cost, element, and traffic. The business owner should think about what kind of property they are looking for before they actually go to look for it. Think about the following criteria: Traffic near the building, leaser rules and regulations, costs of rent, equitable property, property tax, and business needs.
When choosing what type of building a business needs for day to day operations it is wise to list all of the services that a business offers and measure out the space that is suitable to perform each service or function of the business at an optimum level. For example, if a new tax preparation business is looking for office space, the business owner would need a cubicle or partitioned area for each employee, a waiting area for customers, a reception area, restrooms, break room, file area, and manager’s office. The requirements for each cubicle area should be 10’ x 10’ so that there is proper space for a desk area and movement in and around the desk, a file cabinet where all of the needed documents can be kept and readily available, an area where the customer would be able to feel comfortable but not cramped, and an entrance/exit. The business owner would draw the area that they envision, including all preferences, and compare it to any spaces that they check out. This particular business owner would be looking for a space that had around 2500 sq. feet available for lease.
If the business is a larger business or has a higher volume of sales, it may be more beneficial for the business owner to go ahead and purchase the required space for his/her business. With rents being as high as the payments on a business space it is often times a much wiser decision to purchase the property and gain the equity than it is to rent. Remember that the payments in rent could potentially be the payment on a building that could have gained equity. The benefits to owning a business and business space are many. The business owner can do with it what they choose. They can change the interior, exterior, landscape, etc. The only rules and regulations are the rules that the business owner puts forth (with regards to laws and public regulations), and the property will more than likely earn equity year after year. This equity can be used later when the business may need something that the owner cannot afford later on down the road. Another benefit is tax deductible interest. The interest on a commercial mortgage is tax deductible which means that every year, there will be a little bit more money going back into the business. Still another benefit is that there will be no increase in rent later on down the line. A mortgage payment should be fixed if at all possible that way there is no hefty increase when a variable rate increases.
The downfalls to owning a building are few but mighty. The initial expense is quite hefty. This is the down payment. A down payment for a large office building or commercial building is quite expensive. This money could probably be better used for building up the business. Property taxes are another large expense for the business owner but there is, at least, a tax deduction offered by most states for paying them. Also, if the value of the property decreases, the owner loses money. Unfortunately, those are the breaks. And, speaking of breaks… When something breaks, the owner fixes it. This can be costly in certain situations. Unexpected repairs to electrical, building roofs and HVAC can cause a big dip in the pocket of any business large or small. In addition to repairs, lawsuits are also costly. If a customer is hurt on the property it is the business owner’s responsibility. This is why it is always a safe bet to insure any assets. In this day and age people are lawsuit happy, often faking injury just to make a quick buck. Make sure your buck is covered! Property and business insurance is another cost but it is definitely worth the money spent should something occur that the insurance will cover. Finally, if the building is owned, it may be more difficult to relocate a business due to the time it would take to sell. Selling commercial property is often a very slow process and some businesses cannot afford the wait.
If a business is small, it may be more efficient for the business owner to find a small area to lease until the business can grow enough and generate enough of an income that expansion into a larger area is not only needed but now also affordable. If a business is small and does not really have much to it yet, why rent a larger space than what is needed? If the price is the same as a smaller property and the area is similar it may be a good decision but, chances are, it has some unusual rules or owner regulations that cause the rent to be so cheap. It is possible that the owner of the property does not allow smoking, restaurants, sales of alcohol, etc. from this property. These can be unreasonable for some renters or lessees.
Most available space is rented or leased by the square foot. Taking this fact into consideration, it would mean that the larger the area, the more costly it will be. There is no reason to pay an exorbitant amount of extra money for space that cannot be fully used by a business unless the near future of the business is expansion. Rents and leases can be high and a property owner can have many stipulations about the space that is rented. The property is theirs and they may make rules for the people that rent or lease it. However, these rules and regulations should be on paper prior to signing any agreement with a property owner. Always make sure that a rental or leasing document is properly looked over prior to signing to ensure that everything is as agreed upon. Are there any unreasonable rules or regulations that the property owner has set forth? If there are these should be discussed with the property owner before the signing of the lease and any changes should be noted in these documents. Remember that a business owner gains no equity from rented space.
There are certain benefits to renting that does make it seem more acceptable. When the furnace goes kaput the landlord is responsible. There is no out of pocket cost to the tenant for anything that was a part of the rental agreement. Furnaces, water heaters, electrical, etc are all part of a building. When that building is rented, it is expected to be maintained by the owner. If someone gets hurt on the property, the owner is ultimately responsible for any damages. There will be no damages on the part of the business unless the business is proven to be negligible in some way, shape, or form.
If the decision is made to purchase, there are several different loan programs offered for commercial property and more lenders than one could imagine. To ensure that a loan will be approved, be ready with a business plan. The business plan should outline any current situations and needs as well as projections for the future and future needs. Set goals that are realistic, and make sure that, as an owner, all payments are received on time for any debts that are owed. Do not request more funding than is actually needed and make sure that before the papers are signed that there will be enough money coming in to make the payments for the loan, the utilities, labour, materials, and other business needs. By doing all of this, a business owner can prove to the bank that they are a responsible individual with a stable history. This will increase the chances of being approved exponentially!
If the decision is made to rent, a business plan is still the way to go. Just because there will be no purchase does not mean that there should be no plan for the future. Always have a copy of the business plan handy so that it can be revised if it needs be to fit the needs of the (hopefully) growing business. Also, have it just to glance at and compare past expectations to those of the present. It is a helpful tool in realizing a business’s true potential.
Regardless of the decision to rent or purchase, remember to always keep in mind the interests of the business. Make sure that the business has enough room to operate in a safe environment, grow a little, and sell a lot! There are so many options available out there for business owners that it really does pay to do the homework and learn more about the programs, grants and other funding that is available.