For many businesses, leasing office space is a more practical option compared to buying a commercial building. There is less capital required, greater flexibility when expanding or relocating, and more inventory to choose from. There are some advantages to buying commercial real estate such as: owning an asset that may appreciate in value and be sold for a profit, applicable mortgage interest deductions, and control over the property. However, the purchase costs, capital requirements, and commitments necessary to qualify for a commercial mortgage are often out of reach for a small business owner. For many small business leaders, leasing is the prudent option. Here are the benefits of leasing office space:
There are typically more leasing options in desired locations than properties for sale. As such, leasing unlocks more options for businesses seeking an urban or suburban setting. With more choices, you can select the best location to meet both your business objectives and office requirements.
Lower upfront capital
Most lease agreements have fewer restrictions than a typical mortgage. As a business owner, you’ll be responsible for covering a security deposit, pre-lease inspection, and possibly attorney fees and a broker’s fee. Since you’re not purchasing a property, there are no down payments (which average 10% of the building cost), and no mortgage. In contrast to large capital requirements, most leases only require one month’s rent as a security deposit. This gives your business more liquidity since your finances aren’t tied-up in a long-term asset.
Leasing can provide more flexibility for business owners who prefer to invest cash into their core business (inventory, equipment, payroll and operations, etc.). Funds that would be restricted for a mortgage deposit can be reallocated. Unlike debt obligations, lease terms can be arranged based on your projected business growth and goals. About 12 months before the lease ends, you’ll determine whether to renew at the current location or relocate into another space that suits your needs. If you need to vacate the premises before your lease term expires, you are liable for any remaining payments. However, identifying a new tenant to rent from you, known as a sub-tenant, can offset that cost.
Property ownership involves greater insurance liability than leasing space. Leasing enables business owners to focus fewer resources on property risk so they can focus more on growing their business. In addition to lower insurance costs, most leased properties include property management. This removes the vigilance, hassles, and challenges of maintaining and servicing the property from the business owner and their employees.
Companies leasing space can write-off lease payments and other rental expenses for tax purposes. Additionally, businesses can depreciate costs related to office improvements at a much faster rate than building owners. Rather than having to write-off depreciation over many years or decades, the business can depreciate the cost within the term of their lease. Tax-deductible expenses include,
- Lease payments,
- Property insurance,
- Property taxes,
- Maintenance, and
- Office improvements
No ownership risk
If the real estate market declines, you won’t have the risks of being tied to an asset with depreciating value. Also eliminated is the time and effort associated with selling a property. Rather than worry over attracting a potential buyer, the business owner can focus on expanding the company to an additional location.
There are multiple advantages to leasing office space such as fewer upfront costs, more location options, as well as reduced capital and insurance risks. Company capital can be invested in the business rather than real estate. Consult your financial planner before making any commercial real estate purchasing or leasing decisions. And when the time comes, contact Uniland Sales and Leasing; we’re experts in guiding small businesses through the maze of real estate solutions.
Tap or click for a larger version.