Commercial Property: To Lease or Own?

When looking at commercial space, businesses frequently face the decision between leasing property or purchasing property.  This article provides a brief overview of each type of property interest, and the advantages with respect to each.

Lease – A lease is an agreement between landlord and a tenant that sets out the terms and conditions for property rental; where the property is a commercial property, the tenant is generally a business.  The tenant acquires the right to physical and partial economic use of a property for a specified period and specified consideration without obtaining an ownership interest.  The landlord in return earns revenue in the form of rent.

Ownership – When acquiring ownership of property, the purchaser obtains full economic use of a property for an unspecified period in the form of an ownership interest.   Owners may use the property as they wish, subject to mortgage restrictions.

Whether leasing a property or owning it, the use of the property must comply with municipal zoning bylaws, building code rules and other applicable laws.  There are advantages to both

Advantages of Leasing

Availability of Cash –  In general lease agreements have fewer financial restrictions than loan agreements. The entry cost is much lower than a typical down payment that is required for mortgage financing.

Financial Flexibility – Leasing can provide more flexibility for owners who require cash to invest in their business (equipment and inventories). This allows the owner to invest and run the business instead of investing in real estate to house the business.

Spatial Flexibility – Leasing can provide more flexibility if a business expands or contracts. Many businesses are unsure of how things will work out in the earlier stages of its operation and therefore leasing lowers the risk.

Location – Generally speaking leasing allows the user to be at a premier location that otherwise would be unaffordable or unavailable to own. Many locations are landlocked and can only be leased.

Focus – Leasing allows the user to concentrate on its primary business and operation without the distraction of managing real estate.

Advantages of Owning

Property Appreciation – The owner is entitled to the building and land appreciation in value.   Depending on market conditions, this can make ownership a worthy investment.

Income – Portions of the property can be rented and the income from the lessees can be used to pay down mortgage on the property.

Control – The business owner, within legal limits, has the freedom to operate the building as the user sees fit. The user also would not face issues such as lease expiry or the landlord selling the building.

Which choice is best for me?

There are many variables to consider when deciding to either lease or purchase your next real estate transaction for your business. What is the current economic condition? Does it favor one option over the other? What is the interest rate for financing if purchasing is the option?

In general, leasing is a better choice for a business that is fairly new and expects growth. Because of this, capital is better allocated towards business instead of real estate.   However, a tenant is also restricted by the landlord’s requirements, whereas ownership gives the business more flexibility.  Purchasing is also better for businesses that want to own an asset and need a customized space for a fairly long time.

Ultimately the lease vs own analysis is a financial decision.  If both options are available, then a commercial real estate agent can help the business do a lease vs own financial analysis, and assist in making that decision.

The content of this article is meant for informational purposes only. It is not meant to provide any financial, business, commercial, or legal advice. Readers are encouraged to discuss all matters with a commercial realtor or lawyer for all particular situations involving the content of this article.

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