Should you own or lease your commercial business space?
As a small business owner, you’ve become a pro at problem-solving: from managing your cash flow to hiring the right staff to finding financing. It’s all in a day’s work. But a trickier task is understanding whether you should own or lease your office space. The answer may not be so obvious since it depends on your unique situation.
Read on to learn the differences between owning and leasing, and what to consider when choosing the option that’s best for you.
The right amount to spend on space
The percentage of business revenue that should go towards your rent or mortgage depends on the type of business and your financial circumstances. According to small business news and media website Chron, an established law firm with a steady revenue may have no problem allocating 15% to rent. However, retail operations are usually safer to land in the ballpark of. Either way, commercial real estate experts at Coast Capital can help you determine what’s affordable.
Owning: Considerations for commercial real estate
There are a few scenarios for when it could make more sense to own commercial property. For instance, if rent is high and interest rates are low, paying a mortgage may be more affordable. Also, if your success hinges on the location of your business, it may be a good idea to put down permanent roots. Nonetheless, carefully consider the benefits and burdens to commercial property ownership:
The benefits of owning…
- Secure terms: Locking into a fixed mortgage payment offers security. There’s no need to worry about a sudden rent hike or request to vacate.
- Tax deductions: The costs of owning and operating commercial real estate can ease your tax burden. For instance, as a capital expense, the depreciation of the building could be claimed. Mortgage interest payments can also be tax-deductible.
- Additional revenue stream: As an owner, you could bring in a few extra bucks by leasing any empty office space.
- Investment opportunity: The value of the building will likely appreciate over time, giving you equity that can be used to fund your business or retirement.
What to look out for…
- Extra layers of management: You’re responsible for property maintenance and repairs, as well as expenses related to insurance, utilities, property taxes, legal consultation, snow removal, landscaping, waste removal, and more.
- A hefty down payment: For a mixed-use or commercial mortgage, expect to put down between 20% to 50% of the price of the property.
- Long-term commitment: If your business suddenly outgrows the space or the location isn’t right, you may have to stay put depending on your investment.
Leasing: Pros and cons for your property
A lease is an agreement to rent a property owned by someone else. It’s similar to renting, but a lease agreement is valid for a fixed term (e.g., one year or longer) and is re-negotiated when it expires. Leasing can be ideal if your financial situation is in flux but you need some stability.
The benefits of leasing…
- Financial freedom: Property ownership can suck up a lot of money, while leasing usually won’t tie up your cash. Business financing may also be easier to obtain because your capital isn’t attached to real estate.
- Solid contract: A lease is a binding legal document, so once it’s signed it can’t be modified by either party (unless both parties agree to any changes in a lease amendment). So as long as you uphold your side of the bargain, there’s no need to fret about a rent increase or an eviction during the term.
What to look out for…
- Lack of equity: You’re funding the landlord’s investment, not your own.
- Locked-in terms: Since a lease agreement can’t be modified, you can’t re-locate until your lease expires.
- Less stability: When your lease is up for renewal, the owner can increase the rent or even refuse to renew the agreement.
- Hidden charges: Not all leases are “all-inclusive.” You may be responsible for a portion of communal charges, such as janitorial services, utilities, repairs, common area maintenance, and more.
Temporary leasing: Agreeing to customizations
For some commercial business, temporary landlord-tenant agreements could be a path to go down. While this is technically still “leasing,” the terms negotiated would be short-term and more flexible. If the landlord agrees, you could do a month-to-month, short-term lease that’s modifiable every 30 days. A temporary agreement can be ideal if you’re a startup or you want to “test drive” a location—especially during a trying economy. This scenario also buys some time to do more detailed lease planning a little further down the road.
The benefits of temporary lease agreements…
- Flexibility: You can re-locate if needed.
- Tax-break options: You can deduct rent incurred for office space used in your business.
- Short-term safety net: In the coronavirus crisis, approximately one-third of Canadians are currently working from home—a scenario to mull over before committing to an office space. During a time of uncertainty, a temporary agreement might be your best bet.
What to look out for…
- Unstable terms: Since the agreement is renewed for a shorter term, the landlord could increase the rent, change the terms, or even evict you when that time comes.
What’s next if you’re ready to finance a space
If you’ve decided to take the plunge and own commercial real estate, talk to Coast Capital about your mortgage options. Our experienced team knows the real estate market inside and out and can create flexible financing options to fit your business goals. If leasing (for the long- or short-term) better suits your situation, applying for small business financing could help cover other startup or moving expenses. Either way, being prepared can be an important first step—whether you’re just starting out or taking your business to the next level.
Get more smart business tips and advice from Coast Capital’s Small Business Centre.