Lease vs. Buy vs. Build: What’s the Best Option for my Business?
My business is growing, and I need more (or different) space. Should I lease, buy or build to keep pace with our facility needs? In an expanding economy, company CEOs and small business owners alike often find themselves asking this question. Start by exploring the advantages and disadvantages of each of these options: Lease vs. Buy vs. Build.
Lease commercial or industrial space
If you’re starting a new business or need to be in a building right away, leasing may be the best option. Leasing is both practical and affordable, and it’s a good way to get up and running with minimal cost. You can often negotiate with the landlord for a short- or long-term lease, and the owner of the building is typically responsible for its maintenance and upkeep. In some situations, the landlord may offer a build-to-suit option where the tenant can renovate interior space to his/her required specifications.
Leasing has disadvantages too. Finding the right space in the right location can be a long and daunting task. You may want to pay a commercial broker to do the legwork on your behalf. There’s also the risk of having a difficult landlord who doesn’t have your best interests at heart. Depending on your lease agreement, the landlord may have the power to raise the rent and/or the final say in what you do with the space.
Buy an existing commercial or industrial property
Buying an existing building also has upsides and downsides. As a building owner, you can start to receive the benefits of depreciation, interest, investment tax credit to shelter income, and appreciation of value. This gives you the ability to profitably sell, trade or refinance the building in the future. If you are able to buy a building that is already configured the way you want it to be, you are fortunate.
If you need renovations in a building that you purchase, you may very well encounter challenges. It’s advisable to have the building thoroughly inspected before you buy in an attempt to uncover any real issues – such as asbestos or foundation problems. Regardless of the inspection, you never know what’s truly inside the building until you begin demolition and can look at the building’s structure.
If you decide to go forward with buying a building you plan to renovate, be sure to set aside emergency funds for any issues that may arise. No matter how much money you think the renovation will cost, it almost always costs more.
Build out a new flex space or build from the ground up
If you have the capital, the time and the patience, new construction is the way to go. The greatest advantage of this approach: You get exactly what you want. You decide on the design of the building from the ground up. You choose its energy-efficient features, its finishes, etc. You also can rest easy knowing that your new structure has warranties in place for aspects of its construction and the systems throughout; therefore, you can anticipate your deferred maintenance costs for the foreseeable future.
Building a stand-alone structure isn’t the only way to go. Purchasing and upfitting a new flex space is an attractive option for many business owners – especially retailers, medical practices, dentists and other service-type businesses. Newly constructed flex space provides business owners with the ability to enter during the original building construction phase, purchase a unit within the building, and control the entire interior up-fit to meet their precise needs.
As with leasing or buying an existing space, new building construction isn’t without its drawbacks. New construction can take time, and you must be ready to make decisions at critical phases during the design and construction process. Depending on the approach of your architect and general contractor, it’s typical that change orders will happen along the way. This of course results in unexpected costs for you.
Now you’ve pondered the lease vs. buy vs. build equation. If you decide that new construction or a flex space fit-up is right for your company, be sure to investigate the advantages of design-build. The design-build approach will safeguard against change orders and unexpected costs for your new construction.