Rock-bottom interest rates have been rising, so it’s natural for business owners to wonder whether they should buy, rather than rent, their commercial property to lock in today’s low financing costs. The decision, however, is a bit more complex.
“Interest rates are comparatively low today and indeed may have begun to rise,” says Allen E. Green, Real Estate Relationship Manager with Wells Fargo Real Estate Asset Management in Austin, Texas. “But that’s not going to drive the decision-making process because there are much larger issues involved.”
Adds Bill Nimmo, Vice President and Real Estate Relationship Manager with Real Estate Asset Management in Minneapolis, “Buying a building today is a much less risky proposition than it was three or four years ago. Having said that, it’s a very company-specific decision.”
Reasons to lease
Green highlights some of the reasons why a company may opt to keep leasing its offices, manufacturing facility, warehouses, or whatever other real estate is used in its business.
By leasing, he says, “You have the ability to utilize your capital that would otherwise go into down payments, space retrofits, and other expenses that come with the ‘privilege’ of ownership that you don’t have as a tenant. You can then redeploy that capital in areas that might be more effective.”
In addition, leasing real estate outsources property management — and risk. Many entrepreneurs who stay away from real estate ownership believe running their own business is hard enough. With leasing, says Nimmo, “You don’t have the hassles and the time commitment that goes with being a property owner.”
Leasing also can help prevent you from paying taxes associated with taking a capital gain or leaving property to your heirs.
Reasons to buy
There are, of course, an equal number of advantages to owning commercial property used for your business.
First, as an owner, you have the opportunity to enjoy the potential yields from appreciation of the property, Green says. There can also be tax benefits from ownership from the combination of tax-deductible interest on debt and the annual depreciation of the property.
Next, owning the property may be the best way to meet the real estate needs of your business. Nimmo and Green say a business owner must consider the probabilities for both expansion and contraction of the business, and what will happen to the real estate in both scenarios.
“Is the space important enough to the business of the company that they need to control that asset long-term?” Nimmo asks. “If it’s a unique property that’s in a location imperative to the strategy of the company, that may point to a purchase.”
Keep long-term expansion needs in mind, Nimmo advises; a property with extra space inside can address this. The extra space can also be rented to other tenants in the meantime to provide income that subsidizes the building’s cost. A property on a site large enough for a building expansion — or even a second structure — also positions owners for expansion.
Yet Nimmo acknowledges the hazards of making a mistake with a real estate purchase.
“You can look at the economics and say ‘Gee, it’s a great time to buy. I can buy this building at a great price and I can finance it at a low interest rate.’ But if the building is one that the company is not certain they will absolutely need, and if it is a unique building or in a less-than-conventional location, you may not want to buy it.”