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Commercial real estate: Buy or lease?

Factors to consider when weighing your business’s options

Deciding whether to own or rent your office or warehouse is not a decision to be taken lightly. What you decide can have a significant impact on the future of your company and its growth.

There is no one-size-fits-all answer to whether buying or leasing real estate is a better option for a company. Whether your growing business is in need of additional space or you have the opportunity to buy space you’re currently leasing, consider these benefits to both options as you determine what makes sense for your business.

Reasons to own

  • Real estate can be used by the business as a long-term vehicle to build equity in an appreciable asset.
  • Owning helps avoid exposure to rental expense increases.
  • Owning allows businesses to control the portion of operating costs that pertain to occupancy expenses.
  • Owning can provide a tax deferral thanks to the depreciation of the fixed asset.

Reasons to lease

  • Leasing frees up capital for businesses to use toward short- and mid-term expenses.
  • This working capital can be used for growing the business as well, often at a higher ROI than investing in real estate.
  • For companies growing rapidly, leasing allows more flexibility for quick expansion when they need additional space or a new location.
  • When there is instability or fluctuation in the local real estate market, the effects are borne by the landlord instead of the business.

Trends to consider

While these pros and cons are generally timeless guidelines, there are also more current trends that may sway your decision. Currently, real estate prices in California are on the rise. This is due to both a lack of inventory and relative abundance of businesses flush with cash. For businesses with the cash to buy, this can be a good opportunity to invest in real estate. Businesses without a great deal of cash will likely be forced to lease.

Another factor to consider is that interest rates have been at all-time lows recently. But this trend is not likely to last forever. Businesses looking to buy may want to take advantage of these low rates before they almost certainly rise. Leases, on the other hand, are generally set at fixed amount for a set term.

Seek expert guidance

When determining the right choice for your business it is always a good idea to consult a banker with experience in commercial real estate financing. You will also want to conduct market research for your particular space and market area. Having this information is incredibly important when considering investing, and can be advantageous to negotiating a competitive lease.

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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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