Buying vs. Leasing Commercial Real Estate: What You Need to Know

A wide range of companies today are exploring commercial real estate (CRE) options that make the most sense for their organizations. Start-ups, businesses with leases set to expire soon, and those ready to expand their market footprint are all looking for the ideal property. But square footage and location are only part of the equation.

When exploring the benefits of buying versus leasing commercial real estate, carefully weighing each option before signing a contract is a smart move. The decision could affect your business in unexpected ways.

Advantages of Buying CRE

Buying allows you to have more control over the property and experience additional benefits that include: 

Equity. Your loan's down payment and monthly loan payments help build equity in the CRE property.

Equity = Fair Market Value - (Primary CRE Loan + Additional Liens)

Depending on the market dynamics of the location, the property's fair market value may appreciate (or rise), giving you more equity than the amount paid for the property. You can access the equity by either selling or refinancing the property. It's also possible to use the available equity as collateral for additional financing.

Bonus income stream. Generate rental income by purchasing a property with more space than you need and lease the rest. Use the funds to grow your primary business, pay off the loan faster, or simply enjoy the passive revenue.

Tax deductions. You may deduct CRE loan interest and asset depreciation from your business tax return. This could result in a lower income tax liability each year.

Predictable payments. Unlike with a property lease, you can count on a stable monthly payment when you secure a fixed-rate loan. The monthly loan payment will stay the same throughout the life of the loan, and you never have to worry about a rent increase.

Other CRE Buying Considerations

While the benefits of buying the property are undeniable, there are several factors to consider before applying for a commercial real estate loan. Some include:

Cash outlay. Most CRE loan programs have a down payment requirement of at least 10 percent. You must also pay for closing costs and other loan fees. This could mean fewer funds available for other business projects.

Qualification requirements. Similar to other forms of borrowing, you must meet minimum eligibility requirements before being approved for a CRE loan. Requirements vary by lender.

Property repair and maintenance. As the property owner, you are responsible for repairs and maintenance for the entire space. Depending on your arrangement with any tenants you rent space to, you may also have to pay for damages they cause to the property.

Advantages of Leasing CRE

Leasing commercial property could help keep more cash in your bank account. A rental agreement might provide additional benefits, including:

Flexibility. You can relocate when the lease expires without coordinating the sale of your property and relocation to a new space. Unlike buyers, lessees aren't required to make down payments or pay loan fees. They can use these funds for other business-related expenses.

Tax deductions. You may deduct the entire monthly lease payment and other facility-related expenses from your business tax return. This could result in a lower income tax liability each year.

Affordability. You might be able to move your business to your preferred location even in a tight real estate market. It's often easier to rent in desirable locations than buy CRE properties in competitive markets.

Other CRE Leasing Considerations

As with buying, other factors could make leasing a less attractive option. Some that could directly affect your bottom line include:

No access to property equity. When you lease property, you don't own it. You won't benefit from the property's growing appreciation as a lessee.

Rent increases. At the end of the lease agreement, the landlord may raise rent to cover rising insurance premiums, property taxes, and maintenance costs. While you have the option to relocate, the rent increase cycle can still follow you when your new lease expires.

Contact Us for Your Commercial Real Estate Lending Needs

The decision to buy versus lease should align with your short- and long-term business goals. If you're considering a CRE purchase or new construction, a Town and Country Bank and Peoples Prosperity Bank Commercial Banker can help create a personalized Commercial Real Estate Loan financing package that matches your business goals.

Our team of experienced lending professionals understands local market conditions and is ready to discuss how an owner-occupied or investment property fits into your business plan. Contact a Commercial Banker or request a Business Financial Review to get started today!