Location, location, location – the most important factor in the decision to lease (or to continue leasing) or to buy is the value of the location – low cost vs. an attractive, marketable, expandable, site. Don't give up a flexible site (due to transportation alternatives and zoning, for example) for a low cost deal today.
Some considerations in the lease vs. buy quandry:
- Interest rates today and projected for tomorrow (favors buying)
- The power of negotiation in regards to lease terms (favors leasing)
- Ability to obtain local, state and federal grants and low-cost loans (favors buying)
- Flexibility of lease cancellations and going dark clauses (favors leasing)
- Appreciation and growth rate: Believe it or not, the slump in real estate values and construction starts really does represent a "correction," and not a "recession." Look at values over the past 30 years, and "normalize" them. You will find in most markets that a "normal" appreciation and growth rate annually is the net result. (favors buying)
- Facility expenses: As an owner, facility expenses are readily available, and paid monthly; a lessee may get an invoice at year-end for their share of facility expenses that may be unexpected (favors buying)
- Although the internet puts everything at our fingertips, having resources close to the location is imperative to attract the best talent (favors leasing)
- Consider your reporting requirements and tax strategy – there are vastly different definitions of tenant allowances, tenant improvements, inducements, rent holidays, etc. that can affect net operating income and debt covenants. (favors buying)
- Tax deductions and tax credits in the current environment may make buying more attractive, but don’t forget about your tax liability once those accelerated deductions go away (favors leasing)
Also, make sure to use multiple financial models in determining "value." Using comparable sales may no longer be the best method of determining value; likewise, aggressive tax positions may understate net operating income if using a cap method. Also, consider using a sensitivity analysis.
Another important issue when determining lease vs. buy is the purchaser/renter's intention. Is the site a stop-gap during slow growth, and capacity could soon be an issue? Does the purchaser/renter view the site as an investment? Is the building easily expandable, lending itself to a long-term hold? Is building quality important? Would the officers and directors be willing to relocate to the site?
Just as buying your first home was the biggest decision at that time, so should the consideration of lease vs. buy for your business be taken seriously.
Have questions about whether your company should lease or buy space? Contact our Real Estate and Construction Group at 440-449-6800.