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Should you buy or lease premises for your business?

There are pros and cons to both options, and much to consider when choosing either, as M&A advisor Arthur Klein explains
commercial real estate


There are advantages and disadvantages to business owners choosing to buy or lease their premises, and the decision requires lots of analysis and planning. Ultimately, the decision should focus on present and future needs for space and desired return on invested capital.

Here are some thoughts to consider for each option.


Working capital

When well-financed, the property purchase can free up working capital with reduced monthly rent payable. The difference can be used to build your business.

Critical location

Like great employees, supplier and customers, great locations are hard to find. Key metrics will be sales growth, ease of transportation, and reduced operating costs.

Asset management

Beyond operating returns, commercial real estate can become part of investment strategy for personal and business wealth/asset management.

Costly improvements

When investing heavily in a building to run your business – be it for fixed assets and improvements – buying a property makes sense.

But remember…

If you decide to buy commercial real estate, do not underestimate the following elements:

Holding company: Be sure to structure a holding company for control and management of the property. It will also offer key flexibility later on if you want to sell business and/or property or its lease back.

Low interest rates: But for how long?

Stable cash flow: Real property is a long-term investment and should not burden growth or working capital requirements.

Property due diligence: Be sureto perform thorough due diligence on land title, zoning, outstanding taxes, liens, easements and other factors that may exist. As well as the inspection of the building condition before you purchase.


Business lifecycle

During the initial growth and development of your business, the focus will be on meeting market needs and are best to rent until property capacity (and efficiency) requirements can be better predicted or managed.

Adequate cash flow

Often new business will have significant capital expenditures – leaseholds, equipment, etc, and option to lease prevails. As such, initial cash flow will be reinvested in the operation or serve debt – with limited capacity to consider commercial mortgage.

Tenant simplicity

As a tenant, the management of the property defaults to the owner or property manager. This allows you the ability to focus on your business and not be distracted by other responsibilities.

But remember…

If you decide to lease, be sure to pay close attention to the following elements:

Renewal option: What length of initial term and is there an option to renew? Beware that flexibility can work both ways. And if you plan to sell the business, having adequate term or option to renew will be critical to the buyer.

Renovations and improvements: Are there are any limitations on leasehold improvements? Do chattels remain your property, or do they become the property of the owner? Do you have to return the property to its original condition when you leave?

Parking: What is allocated and what is required?

Signage: What are your rights when it comes to signage? Zoning or bylaw restrictions?

Landlord responsibilities:Typically there will be specific terms of whether the landlord or the tenant is obliged to manage and pay for common area maintenance and operating expenses. As a tenant you will want to fully understand your obligations and what additional cost these factors will represent.

In the end, whether you decide to buy or lease a commercial space, make yourself as prepared as possible by following these tips:

Get professional advice

Both an experienced broker and lawyer specializing in commercial real estate should plan and structure your contract carefully with you. And if the property is involved in business acquisition or sale, engaging a licensed business broker or M&A advisor will also help you focus on aspects of your contract that are particularly relevant to structuring business sale.

Critical capital planning

The need to define a property acquisition and/or capital lease improvement plan will be critical to your business success. Careful consultation with your accountant and banker will not only define a budget just for mortgage or rent expense, but should also outline other key costs. Some include: moving expenses, leasehold improvements, purchase of new machinery and equipment, design and construction costs and more. And don’t forget additional insurance coverage/premiums and planning for contingencies.

Business continuity

Moving your business is a demanding exercise. Beyond the financial and logistical planning – it will be hard to avoid the loss of productivity and sales. Task delegation to key employees and communication to your clients and suppliers will help this transition.

As you can see, there is much to take into account when buying or leasing your business premises. All of which should be appropriately planned as with your exit strategy and business sale. And with all key business matters, seeking key professional advice will help you be a better and more successful business owner.