Lease vs. Buy vs. Build: Are you Making the Right Decision?
By Brent B. Johnson
As the owner of a construction company, I've shoveled through my share of business challenges. Few are more confounding than the issue of whether to physically expand, and even more important, how to make it happen.
Should you lease a larger office space, buy an existing building or build a facility? I help clients hammer out the pros and cons of these decisions every day. Here are some tips to help you evaluate your choices.
The most practical and affordable option is to lease space. To figure out how much space you need, start with the assumption that private offices are typically 120 to 200 square feet each, workstations are 80 square feet and conference rooms are 200 to 375 square feet.
The advantages to leasing space include the ability to sign a short-term or long-term lease with an option to renew. Further, it doesn't tie up needed capital. You can take advantage of the building's common areas such as a conference room and fitness facility, and if the structure is large enough, you may be able to move within the building as your business expands. Your landlord takes care of making the space fit your needs and handles ownership responsibilities such as property taxes, insurance and building maintenance. If you partner with a real estate developer/landlord, you can work to have a structure "built to suit" your needs and lease space in that building. This can offer the best of both worlds.
The disadvantages of leasing, however, include the frustrating and time-consuming task of finding the right amount of space in exactly the right location. You might also lose your lease to a higher bidder or building sell-out, and you're at the mercy of the landlord in setting rent and restrictions on building use.
Buying a building offers the assurance that you get what you see. You can immediately evaluate the building's benefits verses cost. You'll also receive the benefits of depreciation, interest, investment tax credit to shelter income, and appreciation of value enabling you to profitably sell, trade or refinance the building in the future. If you run a family-owned business, owning a building is an investment for the future.
However, the space may have to be remodeled to fit your needs and that can translate into much higher costs than the purchase price alone. It may not be in the exact location you desire, could have structural problems and may not be wired for computers or optimum energy efficiency. Your company will experience an immediate cash drain while you're renovating the building and still occupying your current space. You'll also need to handle the ownership issues of utilities, insurance, property taxes and ongoing maintenance such as cleaning, snow removal and lawn care.
Building a new space requires a hard hat but definitely not a hard head. You have to be flexible in deadlines, costs and handling the stress. A good construction manager can act as your advisor, helping coordinate subcontractors and alleviating many of the headaches. You can include your wish list of amenities such as high-speed Internet access, sophisticated heating and cooling systems and a contemporary layout. Current low interest rates can provide a good incentive to build but can also signal a downturn in the economy and in your potential business.
If that downturn happens, owning a building means you'll still be forced to continue paying the fixed costs of building ownership and management. Similar to buying a building, you'll have many upfront expenses and will usually be required to put at least 20-25% down in order to begin work; however, an SBA loan can help reduce that figure to 10%. You'll have to deal with financing, finding the best location, and permit and zoning requirements, which can take several months to finalize. You'll also have ownership issues of taxes, insurance and maintenance.
Before you make the decision on how to physically grow your business,
you'll need to evaluate your long-term and short-term objectives
as well as considering the immediate and future financial requirements.
To help nail down the right expansion choice, seek advice from real
estate and construction professionals.