So your business has outgrown its office space. Or maybe you’re opening a new branch in a new market. Either way – congrats; that’s exciting! But, we know that while looking at potential new spaces is an exciting time, it’s also an intimidating time. And it’s also a delicate time. Do you buy an office space available on the market? Or do you rent an office space that’s for lease in your desired location? There’s no easy answer – every business is different; every deal, lease, company’s needs and scale of growth, is different. Making the choice between buying and leasing a commercial property isn’t as straightforward as with a residential property. So let’s take a look at some of the advantages of both:
Advantages to Renting an Office Space for Lease
Leasing an office space is often a good idea for businesses who operate in volatile markets and/or companies who aren’t sure how fast and far their expansion phase will go. Some pros to leasing an available office space are:
No Down Payment
- Yeah, you’ll probably have a sizable deposit to put down, but it’s nothing compared to the up-to-40% down payment you’d need to buy a commercial property. That means more liquidity, which means more security during your company expansion.
- In every commercial-industrial hub, the best locations are taken first. Especially in a well-established commercial corridor or business park, somebody bought the best spots a long time ago. And why would they sell the space when they could keep it as an investment property? Choosing to rent an office space gives you location options you won’t have with purchasing.
- Not only can you get tax deductions on rent, but any maintenance and upkeep of the building is done and paid for by the landlord. Many times, commercial lessors will even include build-to-suit terms into their leases for lessees who need to make modifications to the building.
- Because you don’t own the property, you don’t have to deal with all the issues that inevitably arise when you own a property. This frees you up to focus solely on your company’s expansion.
- This is a two-fold advantage of leasing an office space over buying. One – if you need to expand into a new office space ASAP, you can acquire a lease within 1 to 2 months. Two – if you’re not sure about the stability in this new location or the trajectory of your business’ future growth, you can negotiate a short lease. Then, if you need to leave, you’re not tied to a huge mortgage.
- Because you’re not invested in the office space you’re leasing, you don’t have huge amounts of funds tied up in the property. Need to expand again into a new location, and quickly? You have the capital to do it. Need to respond to a new market/client opportunity on-the-fly? You don’t have to starve some sectors of your business to finance others.
Disadvantages to Leasing an Available Office Space
Don’t get us wrong – it’s not all sunshine and rainbows with leasing. For one thing, you don’t get to build equity when you’re just leasing an office space. Another factor is that, with improvements and time, the space you’re leasing will appreciate, meaning that if/when you renew the lease, your rent will likely increase.
Additionally, lease payments often outweigh what the mortgage payment for that property is. After all, part of the landlord’s goal is collecting passive income from the office spaces they lease. It follows, then, that since it’s not your office space, there’s no potential for you to collect passive income by renting out an extra room, wing, suite, etc.
Something else to consider is that you’re not in control of ownership or use of the building. The landlord could decide to sell, or decline to renew your lease for whatever reason. That doesn’t happen a whole lot, but it could, and then you’re left scrambling to get into another space before the lease term is up.
Tips for Negotiating the Lease for an Office Space
If you choose to rent an office building for lease in your desired location, here’s a few quick tips on making the best deal:
- Vet your potential landlord thoroughly.
- Be very specific about renewal notices and move-out notices.
- Add an exclusivity clause in your lease so the landlord can’t rent to a competitor of yours (in buildings with multiple tenants).
- Be very specific about terms of maintenance and repairs – who’s responsible for which issues, and the labor and cost of said issues.
- Negotiate security and liability issues should property damage occur from break-ins, vandalisms, weather events, etc.
- Have a lawyer who specializes in commercial real estate law review your lease terms before you sign anything.
The key to any good commercial lease is, the more detail, the better. It keeps roles between landlord and tenant clear and helps your business hit the ground running in the new space.
Advantages to Buying an Available Office Space
Purchasing an office space is often the preference of larger companies who have deep pockets and market stability. It’s also a great option for companies who want to collect passive income by renting the office space to other growing businesses. Reasons to consider buying an office space include:
Equity and Appreciation
- When you buy a commercial property, each mortgage payment builds your equity. And with time and improvements, the office space you bought will appreciate. You’re literally investing in and ensuring the future growth of your business. When you own your office space, you can also deduct all the interest from your mortgage payments on your taxes annually.
Low Cost Variability
- Where leases for office spaces leave room for rent increase and other expenses to change, getting a fixed-rate loan for a commercial office building/suite means you know and can accurately predict your overhead costs over a long period of time.
Small Business Advantages
- Down payments for commercial office buildings can be formidable. But here’s an area where the Small Business Administration helps the little guys out. Most small businesses can get a loan to buy an office space with a down payment of only 10%.
Full Control of the Property
- You’re the owner – it’s your building. That means no chance of getting kicked out, and no compromising on any renovations or modifications to the space.
- Owning a commercial property like an office space is about the long game. Over time, it becomes more and more of an asset, as well as a safety net. Your business reaches another stage of growth and needs to move into a new space? Lease the office space you bought and get some easy income. Company falls on hard times? You have a huge investment property you can offload to help keep you afloat.
Disadvantages to Purchasing an Office Space for Sale
Just like leasing, buying an office space also has drawbacks. You have way less flexibility in terms of movement and further business growth. You’ll definitely run into surprise expenses because, as with any building, things go wrong sometimes. You’re also solely liable for adverse events like damage from extreme weather, a negligent neighboring business, or break-ins. Then, of course, there’s the massive initial costs of buying, which includes more than just the down payment – there’s closing costs, loan fees, and repair and capital improvement costs, just to name a few.
Tips for Negotiating the Best Contract on a New Office Space
If you choose to purchase an office space for sale, consider these things to ensure you negotiate the best deal for your growing company:
- Consider the legal structure of your business and how acquiring and owning a new commercial property affects it. You might have to alter some parts of your contracts.
- Do your research on the market – past, current, and predicted future conditions.
- Consider how much capital you can safely tie up in purchasing a commercial office space.
- Get your lawyer and your accountant on it, and keep them there.
- Work with a local commercial real estate agent from a well-established local firm who provides commercial clients with comprehensive real estate development services.
Building from the Ground up: Buying Acreage for Sale and Constructing a New Office Space
If you haven’t yet considered it, there’s always the option of purchasing commercial land on which to develop and construct your new office space. It’s a big investment both in time and money, but it has its advantages. You get to find the perfect parcel of commercial land for your new office building, and you get to construct a space that’s tailored to your business’ needs. If it’s in a good location and you have the time and capital for a project like this, choosing to construct a commercial facility boasts most of the same advantages as buying.
In our region, empty acreage and farmland on the market will prove a solid investment for growing businesses in the coming years. Great locations, growing commerce, and proximity to an international airport make buying land and constructing a new office space on it a much more realistic option than in other areas, even for small businesses.
Cover Your Bases and ask a Comprehensive Commercial Real Estate Firm
Any time your company enters a growth phase, it’s important to immediately find the support and skill you need to optimize and stabilize that growth. Well-informed decisions are low-risk, and the more people you have working together on your lease, contract or commercial construction project, the better. You minimize the chance of important details getting overlooked, and you have a seamless transition between each step of your company’s expansion.
The best way to do that? Work with a real estate firm that’s (1) local to your desired location, (2) well-established and respected within their region, and (3) able to provide comprehensive services that encompass any and all facets of the commercial real estate development process. Because when it comes to your business – your livelihood and the livelihood of all your employees – it’s better safe than sorry.