Like many, I am optimistic that the worst of the downturn is behind us, and that brighter days are ahead. As a result, I’m seeing many people starting new businesses, and current business owners that are considering moving to a new location to accommodate anticipated future growth.
Regardless of whether a business requires office, retail, industrial/manufacturing or some other type of property (or all of the above), there is a threshold question: Should I lease or buy the real estate where I will be operating my business?
Here are a few considerations which most any business owner should consider when deciding whether to find real estate to lease or buy.
Cash Flow. Cash flow is always a concern for business owners. Often, leasing is appealing as it normally involves less upfront cost than buying, but can involve greater long-term cost, without the benefit of building equity in the property and realizing on any appreciation in the value of the property (depending on the market, of course).
If you need liquidity and cash to maintain the flexibility to build your business, the upfront costs of purchasing a property may not be the best move. As a practical matter, many small businesses and start-ups without a history of performance or current cash flow may have trouble finding the financing to purchase a property, which could make leasing the only viable option.
Flexibility to Move vs. Being “Stuck”. A lease provides the freedom to relocate when your lease expires. If you love your location and do not want to move, you could end up either overpaying to secure a renewal, or not coming to renewal terms and having to go through and undesired, disruptive moving process. For uses that rely heavily on location, the prospect of having to move is frightening. For more “fungible” uses, this may not be a big deal. If you buy a property and it doesn’t work out for some reason, moving can be a more complicated (and expensive) process.
Do You Need Room to Grow and Expand? If you are certain of your short- to mid-term needs, a lease of X square feet can suit you just fine. But what if there is a chance that next big line of business comes through, doubling your needs in the near future? You could buy a property that currently accommodates (or with some renovation/expansion, could accommodate) that growth potential, so you have the ability to meet current and future needs.
Typically, people do not want to lease (and pay for) more space than they know they will need, and subleasing excess space that you lease is often subject to landlord approval, whereas excess space that you own can be subleased as you see fit. In an office building, it may be the case that the landlord can offer you an expansion right on adjacent space, but that assumes that there is space available at your office property of choice, and that the expansion space of predetermined size/dimensions will suit expansion needs. However, if you purchased a 50,000-square-foot manufacturing facility with a current need for 30,000 square feet of that, you have space available to meet future needs as they arise.
Do You Need Control of the Property? Purchasing affords the owner more control over the use of the property than leasing the same property would, as landlords often want to restrict the extent to which a tenant can use, operate and renovate/improve the property.
Splitting the Difference—Making Real Estate Part of Your Personal Planning. Many business owners have realized the benefit of forming a limited liability company (LLC) for the purpose of owning their real estate, and leasing the real estate back to their operating company. There are tax and other advantages to this structure which may allow your operating company some of the benefits of leasing, while securing the longer-term economic advantage of ownership for yourself.
These are just a handful of the myriad issues that arise when a business owner is faced with a decision about where to set up shop. Be sure to consult with a qualified professional when evaluating what approach works best for you and your business.
Content contributed by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Andrew McCullough, J.D., at 704-364-0010 or Andrew.McCullough@wnhplaw.com.