Office Space: Lease vs. Buy
Many businesses reach a point in which
they are curious as to whether it would be beneficial for them
to purchase office space rather than continue to lease office
space. While every business is different there are a few common
factors that should be taken into consideration when evaluating
whether buying office space would be better than continuing to
lease office space. We will take a look at some of the pros and
cons to purchasing compared to continuing to lease office space.
Cash Outlay - Typically if you are planning to purchase
an office, you can expect to make a down payment of between
10% and 25% of the purchase price, depending on the lender and
your credit. When you lease office space you won’t need to put
down nearly as much. With good credit, the typical outlay is
the first and last months rent which is only about 10% to 15%
of the cash outlay required when purchasing office space.
Opportunity Cost – With the large outlay of cash
required to purchase office space, the opportunity cost of
that money needs to be taken into consideration. What return
would you expect to receive on that money compared to the
return you would expect to receive if you invested the money
back into your business or into other investments?
Fixed vs. Variable Cost – When you buy office space,
you have a good idea what your costs will be over the long
term. This is especially true if you have a long term fixed
rate mortgage. If you lease office space, the market will
dictate what you will end up paying for rent over the long
Growth Considerations – The growth phase of your
business should be a major consideration in making the lease
vs. buy decision. If your company is relatively new and/or in
a high growth mode, leasing would allow more flexibility and
fewer constraints to that growth. On the other hand, if your
company is mature and stable, buying office space is great way
to meet your future office space needs.
Property Management – You’ve heard the expression, time
is money. If you own office space, it needs to be managed.
You can either hire out the function or do it yourself. Many
businesses with long term growth plans buy more office space
than they need and rent out the expansion space. All the more
need for good property management.
Appreciation – One of the primary goals of buying
office space is to generate long term increase in value
through market appreciation. A good idea in a healthy market
and usually successful over the long term. It is usually a
good way to add to your retirement fund, but keep in mind that
recent commercial real estate cycles have come in 10 year periods.
Tax Factors – Lease payments are usually fully
deductible, but many expenses of owning office space must be
written off over longer periods of time of up to 39 years. The
good news if you buy is that you get to take depreciation on
the improvement portion of the property and can usually deduct
all of your interest payments. When considering the tax
factors it is always very important to consult with your
attorney and tax professional about the legal and financial
considerations to owning office space.
Cash Flow Analysis – The devil's in the details.
In order to really understand the financial aspect of
purchasing office space, you need to prepare a detailed
comparative net present value cash flow analysis which takes
into consideration your predictions on the future including
holding period, anticipated appreciation vs. rental increase,
interest rates, and cost of expenses increases. It is a good
idea to do three different analyses, optimistic, realistic and
pessimistic, to help determine your margin of error. It seems
like a daunting task, but a good broker, like the ones we have
at OfficeFinder, can help. You could also you a software
The next Step…
While the evaluation of the leasing office space vs. buying
office space decision seems somewhat overwhelming, there is
Getting advice and assistance from a commercial real
estate professional who is involved in the business day in and
day out can significantly improve not only the accuracy of any
analysis, but in general simplify the process. Many of the
lease vs. buy factors can only be decided by you, but having a
helping hand in the areas where office space expertise is
important will assure you of making the best possible decision.