SPECIAL REPORT: The Pros and Cons of Buying of Leasing Office Space

More and more medical practices and small to mid-sized businesses are considering the purchase of office space, rather than continuing to lease. While every business is different, there are a few common factors that should be taken into consideration when evaluating whether buying would be better than continuing to lease.  To make your decision easier, we’ve assembled some of the  pros and cons of purchasing versus leasing office space.

Business Control
Buying an office provides you with greater control over your business.  You can make changes to your office, set your own hours, and conduct your business the way you want.  If you make substantial improvements to your office space, as most medical professionals do, those changes are owned by you and not your landlord.  And you can stay in the same location as long as you like without having to renegotiate your lease.  Leasing, on the other hand, subjects you to your landlord’s rules.  You must provide the amount of insurance they require, abide by restrictions on what you can do with the space, the hours you can be open, and get their permission to make changes to your space.

Fixed versus Variable Costs
When you purchase office space, a fixed rate mortgage can give your business fixed occupancy costs, year after year.  With leasing, the rent will typically increase when the lease expires, and in some cases may include annual rent increases.  Depending on location and pricing, lease cost could be less in the early years than purchasing office space, but with historically low interest rates today, a monthly mortgage payment can be less expensive than a monthly lease payment.  In the long run, however, a purchase is usually cheaper because a landlord, in addition to paying all of the costs associated with purchasing and maintaining the property, will build a profit into the lease, and you won't be faced with future increases in rent.

Equity & Income Potential
When you own your office, you build equity in the property as mortgage payments reduce your loan principal balance, creating equity in your real estate asset.  Many small business owners find it difficult to put aside money annually for retirement.  Buying office space can effectively create a built-in retirement plan that’s funded with payments you’re now making for rent.  While leasing, you are building equity for the landlord, and funding someone else’s retirement plan with your lease payments.  In addition, owning your office can offer the advantage of renting out extra office space, adding an additional source of income.

Appreciation
When you own your office, it may increase in value through real estate market appreciation.  While many other investments are suffering in today’s economy, real estate still proves to be a great asset.  If your location is in an area of appreciating real estate value, such as the Houston market, it should appreciate over time and allow you to sell it at a profit.  Physicians may be able to sell the office when they sell their practice, and have an additional asset to help fund their retirement.  If you’re in a poor real estate market, however, appreciation may not occur.

Cash Outlay
If you purchase an office, depending on the lender and your credit, you can incur more up-front costs than required with a lease.  Purchasing an office can require a substantial down payment, as well as closing costs, versus a lease where you’ll typically pay one month’s rent plus a security deposit.  If a large outlay of cash is required for the purchase, you may have less working capital to invest into your business or other investments.  Today, however, loans are available with as little as 0% down to finance the office purchase, interior improvements, and medical equipment.  If your business is new, or has experienced financial difficulties, lenders may not be willing to extend it sufficient credit to cover most up-front expenses.

Flexibility & Growth Considerations
If your company is relatively new and/or experiencing high growth, leasing would allow more flexibility and fewer growth constraints.  On the other hand, if your company is mature and stable, buying office space is great way to stabilize your future office space needs.  In general, it’s a good idea to purchase your office space when you want to stay in a location for ten years.  While the need for relocation or business expansion is usually less of a problem for medical professionals, it is sometimes a problem for small businesses.  Outgrowing a space doesn't have to be a financial crisis, however.  Office owners who feel they will need more space can also buy more space and sublease it until needed, or in a market with rising rental rates, sell or lease the space out at a profit, and move into a new, larger space.

Property Management
If you own office space, you are responsible for its management and maintenance.  If you rent office space, the landlord is usually responsible for the maintenance.  The costs of maintenance, however, are usually built into the lease cost, and the tenants subject to annual payment of any cost increases.  When you own, whether a free-standing facility or an office condominium, you are also in control of who performs maintenance, and many condominium associations hire a property manager to be responsible for those duties so the owners can focus on their business.

Location
Leasing may enable you to locate your business in a prestigious area where you may not be able to afford to buy.  But purchasing the property would allow you to stay there. You would not have to worry about renewing the lease, purchasing the property or moving at the expiration of the lease term.  You may also find that all properties and office space that would be suitable for your needs are offered only on a lease basis.  Or if the office space is in an area of declining real estate values, and you’re concerned that real estate values may actually drop in value, leasing office space may make more sense.  Conversely, in an area of appreciating real estate values, it would be better to own the property rather than rent it and have the benefit of this appreciation if you ever sell.  Finally, if you want to stay at the same location, you also may not want to lose it because of rent escalations or because the landlord wants the property for another use.  If you own the office, you won't have that worry.

Tax Factors
Both leasing and buying have tax benefits to consider.  When you lease an office, you can deduct rent payments as a business expense.  When you buy, you can deduct property taxes, interest on the mortgage, and depreciation.  Depending on several factors, either leasing or purchasing may offer greater tax benefits.  When considering the tax factors, it is important to consult with your own legal and tax advisors about the legal and financial considerations to owning office space.  In some cases, they may recommend placing the property inside an entity such as a limited liability company, which would then lease space to other businesses, including your own.  Always consult with your own advisors to determine the best structure for you.

Getting More Help
While the evaluation of purchasing versus leasing office space can seem overwhelming, there is help. 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 also simplify the process.  Many of the lease versus 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 having the best information and making the best decision for you.

Ultimately, your decision to lease or buy office space will hinge on a combination of financial, tax, and personal issues.  Bring in your accountant and financial planner to guide you with the best advice.  Some of the basics of comparing leasing to buying, such as trying to predict future price appreciation, considering cash-flow issues and factoring in the cost of a down payment on something you own versus rental payments that don’t build any equity, are similar to the issues involved in deciding whether to lease or buy a house.

In general, however, it’s usually a good idea to purchase a property when you know you want remain in a location, in an area of appreciating real estate values, for ten years.  Historically low interest rates, equity build-up through debt service, potential appreciation, and tax benefits to the owner can make owning more advantageous than leasing.  In addition, specialized industries such as medical professional practices that have heavy and unique infrastructure requirements are generally better off buying their space.  If you have to spend a lot of money to outfit an office to meet your needs, you probably want to own those improvements.  A good broker should be able to perform a lease versus purchase analysis that will help you make an informed decision. But always consult with your legal and tax advisors to make sure your decision is beneficial. 

Generally, leasing tends to appeal to businesspeople who don’t want to make a potentially large upfront investment required with a purchase, who aren’t sure how much space they’ll ultimately need and who simply don’t want to have to deal with the responsibilities of owning a piece of commercial property.  Buying is going to make more sense for businesspeople who are more established, who want to be in one location for several years and who have good credit or the financial resources to make the investment.

Click here for more information on the benefits of office ownership.

Click here for Frequently Asked Questions About Office Condominiums.

Click here for additional information on the features and benefits of CitiPlex office condominium projects.

Click here to download the Sugarland Professional Center brochure.

Click here to download an Own versus Lease Analysis.