The Advantages of Leasing Your Business Property

Is it better to lease your business property instead of buying commercial real estate?

There are many arguments made for buying your own premises. In Part 2 of this series we saw the benefits of owning can include tax breaks, business value, capital, and income, as well as stability. Yet, in Part 1 of this series we highlighted how major corporations like Google, Amazon, and Walgreens routinely rent instead of own. So why lease? What are the perks of leasing your commercial real estate?

Location & Size Flexibility

Things change. As a younger business you also certainly have big aspirations of growing your company. At some point you’ll need more square footage, but may not be able to afford the extra overhead right now. Like many startups you may be asked to relocate to Silicon Valley to be near your venture capital partners. Or like Amazon you may be expanding to more affordable and better logistically situated locations like Florida. Leasing can make those moves a little less complex.

Minimal Liability

As a commercial tenant you’ll have insurance, and the business owner ought to have their own insurance, and maintenance responsibilities. When you lease you just worry about your interior space and get on with business. If you own the building, especially one with additional tenants you may be liable for damages to the building, injured third parties visiting other businesses, and to maintain a certainly level of profitability through other leases, etc.

Highest & Best Use of Capital

Capital and cash flow are normally the biggest concerns when it comes to the buy versus lease equation. Even though you may spend more than the cost of a building on a 20 year lease you also get to use the equivalent upfront capital to deploy in revenue generating areas. For example; if you have the choice between a ten year lease at $1M per year, or buying the building for $10M you may find it wiser to lease. You can put up $1M for the first year’s lease, and then invest $9M in marketing, manufacturing equipment, and so on. If all goes well you will have significantly multiplied that initial capital, even though you’ve effectively burned $10M in rent.

Staying Focused

Unless you already know a lot about real estate or have an educated team on staff who needs more tasks leasing can be the simpler option. There are powerful advantages to staying focused on your main line of business versus splitting your time with mastering the real estate market.

The Cons of Leasing Your Business Property

A report from Meziane Lasfer at the City University of London found that large and high growth companies are more likely to lease than own. However, this paper published by the Social Science Research Network found that while leasing might have some benefits from a stock and valuation perspective, the market may also perceive the costs of not owning real estate as a negative.

Of course if you are going to grow your company can always do both; own and lease commercial real estate.

Which will you choose?