To Lease or Not to Lease
By James Sturdivant
For many businesses, this decision comes down to flexibility versus investment.
When Robb Fine’s company bought an existing, 23-year-old distribution business, the CEO of Indianapolis-based Fine Promotions (asi/194115) inherited more than just an operation and client base. He got a building.
“It was a historical landmark, which is a nice way of saying old,” he says of the structure that came into his possession as part of the purchase. “It had a lot of maintenance issues.”
Fine Promotions therefore made a strategic decision: to sell the building and move into rented office space, which Fine says was definitely the right move, given the nature of his operations. “We moved to the largest industrial park in Indiana,” he says. “We have 2,400 square feet on the first floor, where we used to be upstairs. We also have a dock, which is great.” Costs are lower, he says, and the building is much more accessible than the old space. “It was really a quality-of-life issue,” he says.
Fine’s experience illustrates that the decision about whether to lease or buy space can’t be solved by a fixed formula, and often depends on the requirements of an individual business.
Some businesses decide to lease in order to occupy space in a high-profile or easily accessible area, according to Darrell Zahorsky, a Web editor and author of a forthcoming book, The About.com Guide to Starting a Small Business. “For many business owners, leasing affords the opportunity to have a prime location versus owning a dumpy space in the middle of nowhere,” he says.
Leasing also helps businesses avoid having capital tied up in real estate and can make it easier to borrow funds. And of course, there’s the issue of having to handle your own maintenance.
“There are things we can call the landlord about and get it taken care of, where if we weren’t leasing space, we’re the ones who’d have to stop and do it,” Fine says.
On the other hand, buying is a good, solid investment for a business that can predict what its needs will be down the road. “The upside of buying provides a business with fixed costs, growing equity in the long term and additional tax deductions,” Zahorsky says. “Buying can be risky if your business runs on a tight financial rope. In bad times, you need enough reserve to be able to make payments when your revenue drops by half or more.”
The lack of flexibility that can accompany buying office space can be turned into an advantage if a business rents out a portion of its space until ready to use it. Owning property that appreciates over time also provides a good way for a business owner to help fund his or her retirement, Zahorsky says.
Price can play a role in determining when a business should make the switch from renting to owning. “The price of commercial real estate plays a big role in determining whether to move from a lease or own option or vice versa,” Zahorsky says. “A company may be coming to the end of a lease term, and the commercial market could be at the bottom of the cycle and offer a great investment opportunity.”
Retailers, for whom location is the prime consideration and expansion at a given location less of a wild card, are often more inclined to buy, especially given the cost per square foot of renting good retail space. “Retailing changes the equation,” Fine says. “If you’re in retail, you’ve usually got to do that.”
JAMES STURDIVANT is a contributing writer based in PA.