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Should You Buy or Lease Your Facility?

Filed under Office & HR.

New business owners have a tendency to concentrate on the short-term consequences of leasing or buying an office, store or other facility for their business; for example, they may base their decisions on things like the first-year cash flow projections that would result under each of the alternatives. This is probably altogether necessary: If things don't go well in the first couple of years, your business may not be around to see how a particular decision would have benefited you 10 years down the road.

However, it's a good idea to consider some of the long-term implications, as well. In some cases, buying the facility will be much better for you in the long run, and if you can't afford to buy now, at least you can make it one of your long-term goals.

The main advantage of leasing a business facility is that your initial outlay of cash to gain the use of an asset is generally less for leasing than it is for purchasing.

However, perhaps the main advantage of purchasing is that your facility costs are fixed, and you'll probably end up paying out less in the long term than you would have paid if you had leased the facility. Moreover, if you purchase, you get the benefit of any appreciation in the value of the property.

Aside from the economic issues, the following factors may indicate that you should purchase, rather than lease, your business facility.

  • You want control of the property -- Maybe you intend to make substantial additions or renovations to the property. If you own the property, you have much more freedom to make whatever modifications are needed, provided you observe the local zoning laws and building codes.
  • You want to stay at the same location -- For some businesses, such as certain retail and service businesses, location is all-important. If you have established a winning business location, you don't want to lose it because of a rent escalation or because the landlord wants the property for another use.
  • You are in an area of appreciating land values -- If you think land values will continue to increase, it would be better to own the property (and thereby get the benefit of this appreciation if you ever sell) rather than to rent it.

The following factors, on the other hand, may indicate that you should lease, rather than purchase, your business facility.

  • You don't want maintenance duties -- Many leases place the duty of maintaining the property on the landlord. In that case, you won't have to worry about things like roof repairs, tuckpointing, maintenance of heating and cooling equipment, plumbing, snow removal, and even ordinary housekeeping.
  • You want to retain your mobility -- Maybe you're not sure that the facility that you will select now will serve your needs several years in the future.
  • Your company's credit rating may not support a mortgage -- If your business is rather new, or has experienced some financial difficulties, lenders may not be willing to extend it sufficient credit for a mortgage on the facility.
  • The facility is in an area of declining real estate values -- You may find a facility that meets your needs, but you are concerned that the real estate values in the area are stagnant, or may actually drop in value.

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