Lease vs. Own: Determining The Best Strategy For Your Business

Current Market Conditions

One of the first things you may want to look at is the macro economic environment that is currently affecting the commercial real estate market.  Oftentimes, the lease rates and purchase values will mirror each other in response to market conditions.  For example, following the downturn in 2008/09, Alberta experienced a sharp increase in productivity through 2010 – 2014 where the drastic growth in the economy lead to lease rate escalations, construction cost increases, and therefore sale price increases.  However in the current market, following the oversupply and thus decline in the price of crude oil, we have seen a decrease in economic activity province-wide which has reduced the number of businesses and employees in operation.  This has therefore created a downward pull on market lease rates, and to a lesser extent sale prices, as the supply outweighs the demand.  These factors will affect interest rates, capitalization rates, and capital market rates of return, which will contribute to your decision of whether to lease or purchase your commercial real estate.

Cost of Ownership vs. Leasing

Ownership poses a variety of different costs than leasing a property, especially upfront in the initial investment where the purchaser will have to cover a down payment, legal fees, environmental assessment, building condition report, etc.   However once this initial capital has been used to acquire the property, the monthly costs are comparable to lease expenses.  Additionally, as the owner of a property, there is also the responsibility to cover any large structural or mechanical issues that may arise, whereas if leasing, those expenditures, beyond operating costs and general maintenance, will normally fall on the Landlord (unless negotiated otherwise in the lease).  However, as the owner of the property, there is potential to earn income from leasing out space to other tenants, and of course, the greater benefit that your monthly payment is contributing to increasing your overall equity standing as you pay down your mortgage, which does not occur with leasing.

Long-term Real Estate Strategy

When analyzing the long range strategy of your company, are there any plans to expand/contract/relocate/diversify in the next five years that may affect your real estate requirement?  Should you consider more space so the company has room to grow into the space or should you consider a lease-to-own situation where your lease payments contribute to a final property purchase?  These strategy questions, and many more, will all contribute to the purchase or lease decision, and furthermore to the type or size of property that should be pursued.

Tax Advantages

Property ownership allows companies to leverage tax advantages for their business.  In Canada, commercial property owners yield slightly better tax advantages as they may write off loan interest and depreciation costs while tenants may only write off their lease payments.  This may not be a primary concern in the lease vs. own debate, but should be considered when making the decision. 

Conclusion

There is no surefire answer as to whether leasing or owning is better, it is determinate on many factors affecting your business on a micro and macro scale.  It's important to analyze the information available to you, which may mean considering both options at the outset with your commercial real estate agent.  Getting myself and the resources of Cushman & Wakefield involved sooner rather than later will allow for better assistance in helping you achieve your short-term and long-term real estate and business goals.  By identifying and analyzing all of the factors that affect your business, such as expansion, financing, lease buyout costs, construction costs, etc., I'll be able to help you answer the question of whether to LEASE or OWN.