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Leasing or Purchasing Property: Factors to Consider

All businesses must have a place of operations. Apart from home-based businesses, all must also either rent or own a place of operations. Whether your business is starting up or looking to expand, it is important to make the right choice. The following are some factors to consider when trying to make the right choice. If you have questions about leasing or purchasing business facilities, you should contact a commercial real estate attorney.

Factors that Favor Leasing

  • Cash flow. A business operation can preserve its cash income by leasing. The initial output for a facility might be one month of rent and a security deposit, which can be one to several months’ worth of rent.
  • Credit rating. Leasing may be the only realistic option if the business has insufficient credit to purchase a facility outright.
  • Fitting property. The business has been unable to find suitable property for sale.
  • Maintenance. A lease agreement can require the landlord to be responsible for maintaining the buildings and land the business occupies.
  • Mobility. If the business is expanding or planning on expanding, renting a facility will allow the business more easily to move into larger accommodations when necessary.
  • Real estate values. The facility meets the needs of the business, but it is situated in a location where property values are declining.
  • Tax implications. Rent is deductible as a business expense.

Factors that Favor Purchasing

  • Control. If you want to make significant renovations to the property or buildings, or you want to control the hours of operation without interference, buying a facility may be preferable. Ownership can have some greater measure of autonomy.
  • Location. Territory and access to infrastructure can be critical to many businesses. Being able to purchase a facility can give a business more options when looking for a place to set up shop.
  • Long-term savings. Over time, buying a facility is can be cheaper than leasing. A landlord must add profit into rent to be successful. Purchasing a facility necessarily eliminates the profit margins that a lessee must pay.
  • Property availability. There may not be suitable rental properties available in the area the business wants to operate.
  • Real estate values. The property can be a capital investment the business can leverage if the business grows and needs room for expansion.
  • Tax savings. Taking depreciation deductions on the property over time may provide tax advantages by offsetting profits, which can result in lower taxes. If the property is financed, interest-based deductions may be available.

Economic Outlook

The best method to determine whether purchasing or leasing will be more advantageous is prepare a cash flow analysis. The costs and benefits of each option will vary between business models or even between businesses of the same model but with different assets and liabilities. Choosing to buy or lease should not be taken lightly, as the choice can and will affect the future of the business.

Contact St. Paul real estate attorney Patrick K. Oden to discuss your business needs.

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