Today’s current economic climate poses a unique situation for organizations that are in the market looking for space. Taking into account rental rates and the current sales market as well as the dilemma of deciding whether to lease or buy real estate facilities is a question often encountered by many companies. What are the advantages and disadvantages of each? While every business is different, there are a few common factors that should be taken into consideration when evaluating whether to buy or lease office space.

1. Opportunity Cost – With the large outlay of capital required to purchase office space, the opportunity cost of that capital and alternative uses need to be factored in. If the funds are to be used for a purchase, has the organization decided on an acceptable rate of return or safe rate for their investment and what they expect to receive on that money compared to the return they would expect to receive if they invested the money back into your business or into other investments?
2. Growth Considerations – The growth phase of the business should be a major consideration in making the lease vs. buy decision. If your company is relatively new and/or in a high growth mode, leasing can provide more flexibility and fewer constraints to that growth. On the other hand, if your company is mature and stable or you have a significant specialty use that could adversely affect your lease tenancy, then buying office space is a great alternative to meet your future office space needs.
3. Long Term Business Plan – The strategy should match the long-term business plan of the company; these types of decisions require long-term planning.

But before any decision is made, do your homework; know the pros and cons of both buying, leasing, or sale-leaseback. Below discusses the benefits and disadvantages of each scenario.

THE DISADVANTAGES

• Rental rates with annual escalations based on market conditions.
• Loss of the reversion or the value of any remaining capital investment at lease end.
• No equity buildup or appreciation value of property.
• May be forced to move at the end of the lease.
• Contractual Penalties.
• Subject to Landlord / Property Manager’s operational control.

THE DISADVANTAGES

• If the rental market softens, may be locked into the higher rental rate negotiated at the time of the sale-leaseback.
• Loss of the reversion or the value of any remaining capital investment at lease end.
• Loss of future appreciation of property value.
• May be forced to move at the end of the lease if no renewal options are built-in.
• Contractual Penalties.
• Now subject to Landlord / Property Manager’s operational control.
• Lose the flexibility associated with property ownership, such as changing or discontinuing the use of the property or modifying a building.
• Tax impact may be substantial if the property has been owned for a lengthy period and/or the book value is low compared to the selling value.
• Loss of potential sub-let income.

When considering whether to lease, buy, or sale-leaseback, it is critical to have an understanding of all complete financial implications for your company. Analyze every element of the situation: programmatic space needs in your current environment and five and ten years out, cash flow, future projected expenses, expectations for rental increases and property value appreciation, interest rates, and management costs. You’ll gain the best understanding by breaking things down three times, based on the best outcome, the expected outcome, and the worst outcome. Don’t just think of your business as to how it operates today; consider where your business is going. It seems like a daunting task, but Coldwell Banker Commercial Elite professionals have the knowledge and experience to assist with these decisions.