Should I buy or lease the real estate my business requires?

Leasing vs. Buying

Ownership of real estate has created a lot of wealth in Canada, however, so has manufacturing, retailing and, the professional/service sector in the right office environment. If the best place for your business is at the corner of Portage and Main, do you want to put up the $180 million to buy it?

If the best location for your business is where you have great exposure and excellent customer access, do you want to buy the land and develop an entire shopping centre to get it? Your first priority should be choosing the location that will ensure your businesses success –rental cost is usually a function of sales.

Investment in real estate can take place outside of the space that is needed by your business – i.e.: you don’t need to own the real estate you occupy. To ensure that your business is in the best location you can lease space or engage in a partnership with a real estate developer.

Owning and asset managing real estate properly is a lot of work. If you are convinced that you need to own the space you occupy, are you prepared to become a retail landlord? Repairs and maintenance are often costly and time consuming. Internal resources are required to oversee projects and properly account for them. Additionally, who is going to ensure that you have an annual fire safety inspection and that all tenants are properly notified?  Outsourcing management to a third party company can free up your time in addition to having several benefits including the reduction of costs due to purchasing power benefits.

If you have decided that you will own the real estate that your business occupies, you must ask yourself how long you intend to be in that space.  We have prepared a case study that outlines the importance and ramifications of this question.  The example below is based on a free standing restaurant site on a busy thoroughfare with excellent exposure and access. 

Cash Outflow - Year 1

Cash Outflows - Year 2 to 10

As you can see based on the above graph, annual costs for buying aren’t less than leasing until year 10 or 12. Further, in order to consider buying the property, you would need to come up with approximately two and a half million dollars for closing costs and first year expenses. This money must be sourced from funds that are not dedicated to the business so as to avoid putting a strain on operations. Accordingly, if you are considering buying the space you occupy, you must be liquid and have access to capital so you can sustain your business, which is priority number one.

Sandy G. Shindleman
President & CEO

 

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