Buying Commercial Property for Business Purposes - Buy vs. Lease Considerations

Buying commercial premises for your own business may be very appropriate and infact, opportunistic, given the declines in commercial values across many regions in recent years. Best advice here, is to review the results in your area and see how it compares to 5 or even 10 years ago. Numbers and trends do not lie, and you need to gather the facts on where your market is at currently.

Regardless of the market, and prior to moving in the ‘buy’ direction, you should consider a lease vs. buy analysis. Points to review include:

Location – is it where you see your business being in 5-10 years, is the trade area/market position what you require, is the visibility what you need, can you grow/expand here. From a real estate market standpoint – what is the commercial sales turnover, price growth, trending up/down, etc.

Capital Requirements – even if you mortgage the property, you likely will require 20-30-40% down to secure financing. In addition, all capital costs going forward will be yours (ie. roof, hvac replacement), which may not be the case with a leased premises.

Financing - depending on your jurisdiction, many areas across the country face major challenges in arranging financing. Not only are downpayment requirements elevated, but the rates can be 2-3-4% higher than typical residential rates.

Liquidity Issues – if at some point the equity in the real estate is needed for other purposes and the market has turned down, cashing out becomes a big problem and potentially a bigger loss if you are forced to sell.

Do your homework on the ‘buy – lease’ front, and the decision should ultimately be driven by the economics and what is best for your business. Your internal planning is important (ie. revenue forecasts, staff size, trade area analysis), as is a practical overview of the current real estate market conditions. Again, call on an experienced commercial broker to bring the necessary market details forward as you examine your best options.

That’s it now on any reference to leasing - I promise – but you can see how it is a necessary intro as we move on to the “Buy Side’ in discussing commercial properties. Next week we are on to looking at valuations and how to assess prices within your market.

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