When Leasing Makes Sense

April 13, 2006

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The following factors, if relevant to your situation, may lead you to conclude that you should lease, rather than purchase, your business facility.

Your current cash flow is of vital importance — particularly in the early years, a lease may be better than a purchase from a cash flow perspective. This is because up-front outlays associated with a lease are usually less than those required with a property purchase. With a lease, your main initial cash expense may well be limited to your security deposit, plus first rent payment. With a purchase, you have to have the lump-sum purchase price, or at least a down payment on a mortgage.
You don't want maintenance duties — many leases place the duty of maintaining the property on the landlord. Examples of such maintenance can include the things that are necessary to ensure the continued structural soundness of the building (such as roof repairs and periodic maintenance, tuckpointing, maintenance of heating and cooling, electric, and plumbing equipment), and those that go to the facility's ease of use and appearance (such as snow shoveling of walkways and parking lots and cleaning of windows and common hallways).
You want to retain your mobility — maybe you're not sure that the facility that you will select now will serve your needs several years in the future. You may need more or less space, your target market may have moved elsewhere, or better-suited properties may later be built.
Your company's credit rating may not support a mortgage — if your business is rather new, or has experienced some financial difficulties, lenders may not be willing to extend it sufficient credit for a mortgage on the facility. With the same financial situation, however, a property owner may well be willing to rent a property to your business.
You haven't found a suitable property to buy — you may want to buy, but have found that all properties that would be suitable for your needs have been offered only on a lease basis.
The facility may be in an area of declining real estate values — you may find a facility that meets your needs, but you are concerned that the real estate values in the area are stagnate, or may actually drop in value. In this case, leasing makes sense: let the landlord suffer the effect of the declining values, not you!
A lease may bring you tax savings — the money you pay in rent is deductible as a business expense. Depending on several factors, such as how long you have been in business, how profitable your business has been, and what portion of the purchase price or rent relates to land itself — rather than to buildings — a lease is likely to cut your near-term tax bill when compared with a purchase. (Money paid to buy a business property is not deductible, but depreciation deductions on the building are available, as are deductions for interest paid on a mortgage.)

Lease provisions. If you concluded that leasing your facility makes sense, you will want to familiarize yourself with some of the basic lease provisions.