Need space? Deciding whether to lease or buy
By Beth O'Connell • Bankrate.com

Small business owners have needs for commercial property as varied as their businesses: A metal products company in North Carolina needs a lot of space, some 13,000 square feet plus room to grow; or a Pennsylvania bed-and-breakfast needs to buy and renovate a historical landmark home.

In South Florida, a karate school wants a spot in a busy shopping center where a steady stream of potential customers is passing by.

Lenders and counselors to small business enterprises say once an owner has passed the hurdle of finding property, the decision whether to buy or lease the workspace is a complicated one. Purchasing the property is not always the best move. Sometimes, it's not even an option.

"There's a lot of commercial property available but not always in a good location," says Royland Jarrett of the Small Business Development Center at Florida International University in North Miami. If the facility is not convenient for the business's potential customers, it's probably not worth buying no matter what the price, he says. The owner will end up paying more for advertising and promotion.

"A lot of businesses, especially retail, try to get into the malls where there's a captive clientele, but mall space is generally only for lease," says Jarrett, regional manager of the counseling center sponsored by the U.S. Small Business Administration in partnership with local public, private and educational institutions. The SBA sponsors Small Business Development Centers in every state.

But if your business property is in a good location, and there's an option to buy, is purchasing the best deal?

The pluses of leasing
Advantages of leasing might include a smaller initial outlay of money, not having to pay maintenance costs and being able to move to another location if business conditions become unfavorable.

Yet business advisers point out some obvious advantages to buying: You're no longer subject to escalating rents and landlord restrictions; you're building equity and benefiting from appreciation in the value of the property; and, in the long run, your mortgage payment is usually less than rent for the same building.

Purchasing the property also could be part of your retirement planning. Don Fracchia, senior vice president of Wells Fargo's business banking group, says a business owner could purchase the property as an individual and turn around and lease it to the company. That way, in 20 or more years when the loan is paid off, the owner "continues to have an income stream in retirement," Fracchia says.

Tax advantages
When it comes to taxes, there are advantages to both buying and leasing. Like a home loan, the mortgage interest on commercial property is tax deductible along with an annual depreciation allowance.

However, when leasing, the rent payments are deductible as business expenses. In the short-term, the tax bill could be smaller for leasing than buying because the down payment on commercial property is not deductible.

Be careful where you step
Jarrett says he advises business owners to beware of getting stuck with property in an area of declining real estate values. Likewise, overspending on a property will hurt profitability and can make it more difficult to borrow money for the business.

A business owner has to consider whether the money put toward a purchase down payment, which could be $100,000 or more, might be better spent investing in the business operation.

When are you ready?
Lenders find that the typical business owner who feels ready to purchase a facility is beyond the startup phase. "The company has been in operation a minimum of five years, and the owners are confident it's a going concern," says Fracchia of Wells Fargo.

The bottom line in deciding whether to buy or lease your business property is an analysis of the projected cash flows under both alternatives. According to SBA-sponsored information on financing a business, such an analysis compares the cost of each alternative by considering the timing of the payments, tax benefits, the interest rate on a loan, the lease rate, and other financial arrangements. A Small Business Development Center in your area, or a commercial lender, can help you with this analysis.

Beth O'Connell is a freelance writer based in Florida

-- Posted: May 6, 1999