As simple as it seems, this can be a very difficult question, whether you seek Tucson office space or another type of commercial building. Every business is different…yet the factors affecting this decision are pretty constant. A good place to start is a discussion with your attorney and/or CPA to determine which options provides the best tax advantage for your business. Tax deductions, depreciation, appreciation, improvement costs and payments are all treated differently with a lease or a mortgage. Pending rules related to lease accounting are due out this summer and may impact how businesses approach the lease versus buy decision. There are many aspects to this question, and it will require an expert’s help.
The availability of cash is also a big factor, with a purchase typically requiring a larger initial outlay due to the down payment as well as the various associated fees. A lease typically requires only the payment of first and last month’s rent. A more in-depth cash flow analysis may also be needed to look at the true short and long-term economics, and it’s very important to use realistic assumptions in this analysis. For many companies, it just comes down to the use of available cash…Is the return better if invested in real estate or in business operations?
Another key factor is flexibility. Are your space requirements expected to grow, remain constant or possibly even contract over time? If you can project your space needs for a reasonably long period of time, 5 to 10 years, a purchase could make sense. On the other hand, if this could change every few years, leasing may offer more options to address the changes.
Another aspect is the ability to project costs over time. A mortgage is more constant and predictable, while a lease is affected more by the changes in the overall real estate market over time. Final guidance on accounting for operating leases may impact this consideration, as well.
Again, every business is different and has unique requirements, but all businesses need qualified professional assistance in dealing with the many factors related to the lease or purchase decision.Tom Nieman, specializing in commercial real estate since 1977, possesses a diverse background in brokerage, development, and management. He joined PICOR in 1995, focusing on the office, medical and investment markets, becoming a Principal in 2001. He excels in providing the best solutions to the real estate requirements of developers, landlords, tenants and investors. Photo credits: Gary Rumack Photography, dreamstime