Should You Purchase or Lease the Property When You Buy a Business
Many buyers looking for acquisitions today in the small business marketplace struggle with the decision whether to buy or lease the real estate for their business operations. With real estate values having been softened by the economy, now may be the best time to evaluate the pros and cons of small business real estate ownership. Following are some of the major considerations in making that decision.
- An owner can accumulate equity with long term real estate ownership through paying down the mortgage and experiencing market appreciation in the value.
- As landlord, you don’t have someone else dictate rent increases or uses of the property. The property owner can lock in a fixed overhead cost for their facility.
- Excess space can be used as the business grows or may be used to produce incremental income from rents.
- There may be significant income tax savings from depreciation.
- Financing options are more numerous for real estate than for other capital assets.
- The buyer can establish a separate real estate holding company to own the real estate asset. When the business is closed, or sold for retirement, the real estate asset will retain important appreciated value and rental income potential in a separate holding company.
- Being tied to a facility and specific location, that may have limited space, may not be the best strategy for a rapidly growing company.
- A down payment is required to finance a building purchase. A buyer may not want to sacrifice cash which can be used for growing the business.
- A property owner must be ready to take on responsibilities for maintenance, security, remodeling, and other management issues.
- Personal guaranties are required for most small business property mortgages.
As with any major small business investment decision, the prudent buyer should consult with an accountant or attorney to help weigh the pros and cons in making that decision. To reach a decision, the buyer needs a good understanding of real estate value versus business value, as well as a formula for comparing the financial and legal aspects of leasing to those of owning a business property.