To Lease or To Buy

Oct 25, 2016

With the cyclical nature of real estate markets and building values rising and falling, many users ask the question should I lease or buy? The answer in part depends on a number of factors.

Are space needs static or do they require flexibility for expansion or contraction?

Can the property accommodate the requirements of the business for 10 or more years? If the answer is yes, then this will reduce the risk of having to sell at the bottom of the next cycle.

Can the company obtain financing, and if so, at what rate and terms?

Can the company obtain financing without recourse, other than the property being purchased used as collateral?

What is the opportunity cost of funds invested, and is the return generated from ownership greater than other investment opportunities?

What types of lease alternatives are available, and what are the financial terms after all concessions and allowances are taken into consideration?

If excess space exists, how does the business feel about being a landlord and property manager?

The best way to determine what is best is to analyze the costs of owning versus leasing. This must take into consideration the impact of equity down payment as well as funding capital improvements which may be required prior to occupancy and over the useful life of the property.

Other factors which will come into play include:

Flexibility: The flexibility on term associated with leasing can be a significant advantage to tenants.

Location: There may be more sites available to lease as compared to purchasing. Ultimately location must not adversely affect the company image, its employees, or its clients.

Capital: How much is required up front and what are the long range capital needs to fund repairs, improvements or replacement of building components and systems.

Accounting standards, depreciation and taxes: If accounting standards are modified to require that leases and the options associated with renewals are treated as a capital expense then ownership may gain in appeal. Depreciation schedules and capital gains tax rates may also affect the decision to lease or own.

In conclusion, we believe there is currently a window of opportunity to purchase at historically attractive prices. On the other hand, lease rates have also benefited from these same market factors making a thorough and thoughtful analysis of each client’s situation prudent.

If you would like to discuss lease or purchase options, and the dynamics of these alternatives, contact us at 612-466-7300. Our comprehensive property database and access to market information can be used to determine if viable options exist and are worth your lease or purchase consideration.