Buying a piece of commercial real estate can be a great way to invest in your company’s future, but it is not always the right choice. The upfront costs can be very difficult to manage for smaller companies and those without deep cash reserves, and by contrast, a lease agreement is a fraction of the cost between upfront fees and the monthly payment, even if the month-to-month expenses tend to be a little higher than a commercial mortgage payment. The costs and fees are not the only considerations when it comes to the impact a lease or purchase could have on your company’s finances, either.
Costs of Doing Business vs. Asset Investment
When you lease a space for your operation, the entire cost of the lease goes into your regular business costs alongside expenses like advertising, payroll, and inventory. By contrast, when you invest in commercial real estate, your financing costs are not typically considered standard costs of doing business, at least not entirely. As a result, your tax obligations could wind up being lower with the lease than with a purchase. It is hard to say for sure, but it often works out that way.
Equity and Future Financial Planning Options
The trade-off to the tax issue is the fact that asset investment opens up other doors for cash management and financing that could help you expand your business faster than you would otherwise be able to do. For that reason, the options available to you as you build equity in the commercial real estate investment should be factored into your financial projections when drawing up financial projections for each scenario.
Upfront Costs and Cash Reserves
Commercial leases have a variety of fee structures that often require you to have a significant cash investment at the beginning, but since the LTVs on commercial mortgages tend to be 50-70% under many programs, they are seldom as expensive as the down payment on a mortgage. That being said, the large down payment requirement also makes it easier to build the equity you need to take out a credit line or another financial product when you need cash-out financing.
Which Choice Is Better?
If cost is not a consideration, your company’s long-term prospects are likely to be better with a real estate investment than a lease. The exceptions would be if the location is perfect and only available via lease or if you need the facilities for a limited amount of time. When cost is an issue, the lease is often the easier way to access the space your company needs.