By Steven R. Price, CCIM
Eventually, most users of commercial space ask themselves the question “Should I lease or purchase?” The answer lies in a thoughtful assessment of numerous subjective questions and a thorough, objective analysis of the cash flows aftertax of the lease-versus-own alternatives. In addition, the decision to lease or own is often driven by the cash needs of the business owner; the space needs of the business; whether the space is retail, office, industrial, mixeduse, or special use; the importance of branding, protecting, or creating trade areas; establishing franchise value; or other circumstances. When considering whether to lease or own, users of commercial space need to recognize and evaluate the advantages and disadvantages of each alternative.
Advantages of Leasing
Location: Leasing can allow a user to occupy space at a premier location, or in a synergistic multi-tenant environment, that the user otherwise couldn’t afford. Spatial Flexibility/Mobility: Leasing can provide greater flexibility to a user who many need to expand or contract, and can provide mobility if a user needs or wants to relocate. Availability of Cash: Leasing typically requires less cash out of pocket than ownership alternatives, leaving more capital to invest in the user’s products and services or to establish additional locations. Source of Financing: Leasing can be viewed as a source of financing, since many small or marginally profitable firms may find traditional financing difficult to obtain. Stability of Costs: The long-term occupancy costs of leasing, when viewed from the user’s perspective, are generally simple to estimate and typically include base rent
Steven R. Price, CCIM, Benson Price Commercial, Colorado Springs, Colorado, has a national tenant representation and consulting practice. He was the 2006 President of the CCIM Institute and is a Senior CCIM Instructor.
Leasing is a means for a user to assume physical control and to reap a partial economic benefit from commercial space without obtaining an ownership interest in a property.
Owning is a means of obtaining the full economic benefit of a propcosts of leasing erty, including cash flows from operations and capital appreciaare fully tion, for an unspecified period. When an owner is also a user, physical use of the property is also deductible. . . obtained. Although most users acquire property through the use of Tax Benefits: Unlike ownership, equity and debt financing, most the occupancy costs of leasing are owners are free to use the property fully deductible, including that portion of rent as they wish, even though they are obligated to the attributable to the value of the land. mortgagor. Focus: Leasing space allows the user to concentrate on its primary business without the distractions of Advantages of Owning management. Appreciation: An owner enjoys the benefit of capi-
(pure net, pure gross, or a hybrid), operating expense pass-throughs, amortized tenant improvements, percentage rent (retail), and the like. Although some leases may expose a user to certain capital expenditures, tenants are generally insulated from unforeseen capital costs such as the replacement of mechanical systems, structural repairs, and roof or parking lot replacement.
Unlike ownership, the occupancy
parking, hours of operation, use or compatibility, or building services.
Disadvantages of Leasing
Cost: For a firm with a strong earnings record, ready access to capital, and the ability to take advantage of tax benefits from ownership, leasing is often the more expensive alternative. Loss of Appreciation: Leasing means the tenant does not benefit from property appreciation. Contractual Penalties: If a leased property becomes obsolete or the business occupying the space becomes unprofitable, the tenant must continue paying rent or face penalties for default. Loss of Salvage Value: Most leases provide...