To lease or to buy when it comes to the land and space your business calls home?

John Ingrassia, a New Jersey land developer and investor, suggests there are some sound reasons to consider leasing your business real estate instead of buying it. That’s what most big Fortune 500 companies do, he points out.

“They almost all of the time lease rather than buy,” Ingrassia says. “The question is, ‘Are you in the real estate business, or are you in some other business that will benefit more over the years from your ability to use the money to buy newer and better equipment, and products to sell and increase your overall business?’”

Given the volatile nature of real estate prices, he believes, over a 10-year period a well-run business will do better putting its money in areas such as marketing and inventory, ensuring it’s visible to customers and prospective customers, and always prepared to meet their needs. Even after one subtracts the monthly or annual cost of leasing your business property, Ingrassia says, the return on investment could easily be 10 to 12 percent a year better.

“You rarely see a bank, McDonald’s, or other large successful company owning real estate because money invested in inventory or advertising yields a greater return — even given the tax credit of owning.”

 

Startups and Veterans

For a startup business, leasing is an obvious attraction. Just as a new college graduate taking her first job may have no choice but to rent an apartment instead of buying a home until she can save for that big down payment, the startup business can marshal whatever capital resources it has more efficiently if it doesn’t tie it up in a major real estate commitment to start with.

Especially for a long-established, multi-generation operation, there are, of course, solid reasons to own your real estate — especially if you already own it free and clear. If your grandparents started up your firearms business, bought the land and built the buildings, and your parents made improvements and have paid them off, there probably isn’t much advantage to just turning your back on that and going out to lease something new instead.

On the other hand, perhaps you already have a business reason to move. You could be landlocked with no room to expand your footprint even as you’re growing at such a fast clip that you’ve added new employees, new equipment and even new services as you expand into related lines of business.

Where is that new gunsmith shop going to go? Or what do you do if your community has developed so that your primary customer base has moved farther and farther west of town, no longer surrounding you like spokes around the hub of a wheel? All those and more scenarios may put you in the position of having to look at relocating anyway — and if so, the buy-or-lease decision may be relevant even to you.

 

No Single Answer

Harry Hecht, a strategic business consultant and entrepreneur coach in Orlando, Florida, says the real answer to the “lease or buy” question when it comes to business real estate is, “it depends.”

“A business should rent or lease a facility to start, preferably on a short-term basis,” Hecht says. “This way the business can plan for growth and not commit too early to square footage or a location that may not work for them a few years down the road.”

An alternative? “Share a space with another company,” he says. “Many property owners are not fully utilizing their facilities and may be able to offer greater flexibility through a sharing arrangement.

“The goal for any business, especially a newer one, is to keep expenses as low as possible until the business is consistently profitable. Owning a property might seem like a good idea, but there are significant risks should business begin to deteriorate or possibly accelerate where additional space is needed.”

But this is not a one-size-fits-all question, he cautions.

“Owning offers a business the opportunity to build equity outside of the value of the ‘business,’” Hecht points out. Some, like Ingrassia, might look askance at the tax advantages or the potential for appreciation when you own your property. But Hecht says those can be real benefits.

“In addition, there are tax advantages and potential appreciation gains available should the value of the property increase,” he says.

But there is still that potential downside: “There is also the risk that the property value could go down, and the owner may then have to come up with cash to sell the property if they are in a negative equity situation.”

 

The Location Factor

There’s the old saw that in real estate, the three most important features are “Location, location, location.” That’s an important point to remember when considering your business property options and making that lease-or-buy decision. Leasing, of course, gives you the flexibility to move should your current location no longer be adequate for your needs.

So too, when buying, you need to be able to look at that location with the long view in mind.

“Always be sure that when acquiring any property for a business that location is still very important, and should be in your servicing area and close to your employees,” Hecht says. “Also be sure that there are options for expansion and that the zoning is properly researched prior to any commitment.”

There is another option to consider, Hecht points out. You could set up a separate business entity that owns the property, then leases it back to your retail or service business, which pays the rent. An arrangement like this can give you some of the advantages of flexibility — unshackling your business from the land it is on — while at the same time maintaining the advantages that building long-term equity can provide. Should changes make it advisable for you to move your operation elsewhere, you might still profit in the long-term if you can find a new customer for the property you own even as you leave it behind.

Then, your answer to Ingrassia’s question might actually be, “Well, I’m in both the real estate business and my other business.”

These are highly complicated arrangements, and you shouldn’t consider them without walking through all your options, their advantages and disadvantages against your specific business conditions, needs, and long-term plans with your lawyer, accountant and other professional advisers.

If rethinking exactly what kind of relationship you want to have with the grounds and buildings your business stands on intrigues you, it might be time to take a closer look.