What Does Owning Your Building Really Cost Your Business?

Every owner knows the visible costs of a building: mortgage payments if there is a loan, property taxes, insurance, utilities, maintenance and the occasional large repair. These show up in the accounting system and are easy to total.

They are also the least interesting part of the question. A tenant under a net lease pays most of the same operating costs. The costs that distinguish owning from leasing are the ones no invoice arrives for.

The largest hidden cost is the equity itself. If your building is worth more than you owe on it, the difference is company or family capital sitting in real estate. It is not available for inventory, equipment, hiring, an acquisition or a cushion against a slow year.

Economists call this opportunity cost: what that money could earn if it were used another way. An operating business usually exists because its owners believe they can earn more from their own trade than from passive investments. If that is true of your company, then every dollar parked in the building is earning the real estate's return when it could be earning the business's return.

This cost is real even when the building is fully paid for. An owner with no mortgage sometimes says the building costs nothing. A more accurate statement is that the company is paying itself no rent on a valuable asset, and the unpaid rent is the price of leaving the equity where it is.

A useful test: if you had the building's equity in cash today, would you use it to buy this building? If the answer is no, you are choosing ownership by default, not by decision.

Roofs, parking lots, heating and cooling systems, dock equipment and elevators wear out. As owner, you fund the replacement when it fails, whether or not that is a good year for the business. These projects compete directly with the investments that grow revenue.

Leasing does not make these costs disappear. Under many net leases, including most sale-leaseback leases, the tenant remains responsible for much or all of this work. The difference an owner should notice is narrower: who must come up with the money, when, and whether the lease gives the tenant any help with large end-of-life replacements. That is a negotiated point, not a given.

Someone in your company is the building's property manager. That person bids the roof contract, protests the property tax assessment, renews the insurance, handles the snow plow vendor and deals with the municipality. In many owner-occupied companies that person is the owner, the CFO or the plant manager.

The hours are rarely tracked, so the cost is rarely counted. It is worth asking what those hours would be worth if they went to customers, operations or finance.

Again, be realistic about what changes. A tenant under a net lease still manages day-to-day upkeep. What a sale mainly removes is the owner's role: financing the asset, deciding when to sell and carrying its long-term fate.

For many family and closely held businesses, the building is one of the two largest assets the owners have, and the other is the company that occupies it. Both depend on the same local economy and often the same industry. If the business struggles, the owners may need to sell the building at the moment it has lost its tenant.

Ownership also concentrates location risk. A building that fit the company ten years ago may be the wrong size, in the wrong labor market or the wrong distance from customers today. An owner can sell and move, but selling a building is slower and less certain than letting a lease expire.

None of this means owning is a mistake. Ownership has benefits that leasing cannot fully replace, and a fair comparison counts them.

• Control. You can alter, expand, reconfigure or change the use of the building without asking anyone's permission, subject to zoning and your lender.
• Stable occupancy cost. With a fixed-rate loan or no loan, your cost of occupancy does not rise with scheduled rent increases or reset at a renewal.
• Security of location. No landlord can decline to renew your lease or sell to a buyer with other plans.
• Appreciation and equity. If the property gains value, the gain is yours, and each mortgage payment builds equity.
• Depreciation deductions. IRS Publication 946 explains that you generally must own property to depreciate it, and that the cost of land cannot be depreciated. An owner can deduct depreciation on the building; your CPA can tell you what that is worth in your situation.
• Residual value. When a loan is paid off you still hold an asset. When a lease ends you hold nothing but the right to negotiate a new one.

For a company with ample capital, a long horizon at the site and no better use for the money, these benefits can outweigh every cost described above.

You do not need a complex model to see whether ownership is serving the business. Work through these questions with your CFO or CPA.

• ✓What is the building worth today, and how much equity do we have after the mortgage?
• ✓What would the company realistically earn, or save, if that equity were available as cash?
• ✓What capital repairs are likely in the next ten years, and how will we fund them?
• ✓How many hours a year do owners and senior staff spend on the building?
• ✓What share of the owners' net worth is in this one property?
• ✓How confident are we that this location and size will fit the business in ten years?
• ✓If we sold and leased back, what rent would we pay, and how does that compare with what the equity could earn?

The answers will not always favor selling. Sometimes they confirm that owning is the right choice. Either way, the decision becomes deliberate.

This is the first conversation TAG has with an owner considering a sale-leaseback. We start with the company's goals and the building's realistic value, and only then look at whether a sale, a refinance or no transaction at all fits best.