Should Your Business Buy or Lease Its Building?

Buying commercial real estate to occupy is two decisions wrapped together. One is about where your company operates and how much freedom it needs. The other is about whether your company should hold a large, illiquid asset alongside its actual business. A building can be a sensible answer to the first and a poor answer to the second.

That is why comparing this month’s rent with an estimated mortgage payment rarely settles anything. CDC Small Business Finance, a lender to owner-occupants, lists that comparison among the common mistakes, because it leaves out taxes, insurance, maintenance and repairs. It also recommends deciding on ownership before talking about loans, since the first question is whether owning supports the business at all.

Start with the questions below. They are ordered so that a clear answer to an early one can save you the work on the later ones.

• ✓How long are we confident we will operate from this location, at about this size?
• ✓Could the business shrink, double, change its model or be sold during that period, and what would a building do to those plans?
• ✓After a down payment and upfront costs, how much cash remains for operations and a bad year?
• ✓Do we need changes to the space that a landlord would refuse, or a location that only a purchase can secure?
• ✓Who in the company will handle the roof, the mechanical systems, insurance claims and contractors, and what will they stop doing to make time?

Time horizon usually carries the most weight, because purchase and sale costs need time to pay back and a sale takes time to arrange. Truist, in its small business guidance, suggests a company confident of staying about seven years may consider buying. Treat that as one bank’s rule of thumb, not a threshold. Your own answer depends on your costs and your business.

Speed matters too. The same guidance notes that a company needing to be running within a month or two may lean toward leasing, and that a constrained area such as a downtown may offer more space to lease than to buy.

Neither path is the safe one. Each moves risk to a different place.

• Cash at the start. Buying commonly requires a down payment plus closing costs, appraisal, environmental review, inspections, legal fees and title costs. Leasing usually requires less upfront, often a security deposit, though the build-out can still cost money.
• Monthly cost. A fixed-rate loan can hold the debt payment steady, but taxes, insurance and repairs still move. Rent can rise, and at renewal the landlord sets the opening position.
• Control. An owner decides on renovations and additions, subject to zoning, codes and any lender terms. A tenant will likely need the landlord’s approval.
• Flexibility. A tenant can leave at expiration, and a lease may allow a buyout, sublease or assignment. An owner who needs to leave has to sell or lease the building, which may be harder in a downturn.
• Upside and downside. An owner keeps any appreciation and the equity built through loan payments, and also absorbs any decline in value. A tenant has neither.
• Workload. Depending on the lease, a tenant may share or pass along maintenance duties. An owner has all of them, plus the management time.

If the main reason to buy is that rent feels like wasted money, test that belief. Rent also buys flexibility and frees capital, and both have value.

Once the framework points toward buying, or leaves you undecided, run the numbers side by side. CDC Small Business Finance suggests modeling likely costs over the next 5 to 10 years.

• Lease side: rent, scheduled increases, common area and net charges, utilities, improvements you pay for, and the cost and risk of relocating at renewal.
• Own side: loan payments, property taxes, insurance, utilities, maintenance, repairs, closing and due diligence costs, and renovation needs.
• Both sides: what your cash would earn if it stayed in the business, and what happens at the end of the period, either a sale of the building or the end of a lease.

Use your own quotes rather than general assumptions, and run a pessimistic case. A comparison that only favors buying when the building appreciates is telling you something about how much of the decision is a real estate bet.

Tax treatment differs, and it matters, but it seldom justifies a choice the business facts do not support. The IRS small business tax guide says rent for property used in the business is generally deductible, and that business interest and real estate taxes on business property can be deductible. Owners also depreciate the building, though IRS Publication 946 states that land cannot be depreciated, and it lists a 39-year recovery period for nonresidential real property. These rules can change and depend on your structure, so have your CPA model both paths.

Accounting is also not the tiebreaker it once was. RSM’s overview of ASC 842 explains that lessees now recognize right-of-use assets and lease liabilities for most leases. So leasing still creates a balance sheet item for most tenants, and your CPA and any lender with covenants should see how each path changes your statements.

These patterns are starting points, not verdicts.

• Leaning toward buying: a long, confident stay; a specialized use that needs lasting investment in the space; steady earnings; cash left after the purchase; and someone with time to run the building.
• Leaning toward leasing: uncertain headcount or a changing model; a possible sale of the company; better uses for the cash inside the business; or no appetite for running a building.
• Worth a harder look: you want to own, but the right building is larger than you need. That adds landlord duties and possible financing limits to the decision.

Tenant Advisory Group represents occupiers on both leases and purchases, so we can price both paths for the same company and test them against the same plans for growth. The result should be a decision you can defend to your partners or board even if the market moves against you.