42 years in business.

Monday, December 28, 2009

To Lease or Own

As seen in Erica's monthly real estate column, "Real Property Realism"
in Connecting Rochester Magazine.

America is built on entrepreneurship, small businesses sprouting out of someone’s basement or garage-low overhead, lower risk. When it comes time to consider moving your growing business to a storefront, you must consider the difference between leasing versus owning a space. There are pros and cons to both alternatives.

If you have an established business, making the move to rent or purchase office space may be a little less stressful. You should be able to put together a budget and figure in the cost of the lease or mortgage payment. The following are some thoughts on purchasing a property. When you own your business space, you are free to make any changes, including making room for another office or rental apartment to help share the overhead. You are in control of your property when it comes to parking, maintenance, and improvements. Also, you have obtained an investment. Most people in small business build personal wealth by buying a piece of property because often times the value of real estate goes up more than the business itself.

However, in order to purchase a property for business purposes you are tying up a significant amount of cash. You will be taking on a debt service that includes insurance and cost of maintenance like plowing, garbage pick-up, etc. Owning a commercial property or purchasing a building/house to use for business may be good for some but not worth the commitment for others. It does depend on what type of business you operate.

Kevin Mulcahy, owner and operator of Mulcahy Landscape and Design currently leases a building to house his trucks and equipment. Ultimately he would prefer to purchase a property but location is what made him decide to lease. “Most of my business is in the Irondequoit area, and there are few options for purchasing property,” he states. “The lease works for me because it keeps me close to my customers.”

One thing to take into consideration for a lease contract is length of the term, usually 2-5 years. The landlord wants to secure space for a certain amount of time. If you need to change the office area and make improvements to suit your business, make sure you consult with the landlord before signing the lease. The owner will often do the work for you and divide the cost by the terms of the lease over the duration of your agreement; this is on top of your lease payment. In other words, an extra cost per month. Small landlords may make you do the improvements on your own dime. When you leave the space, you do not receive back any of the money you invested in someone else’s property.

However, leasing allows you to come up with less cash, and you are not tied to the space for the long term. Usually there is an option to leave after 2 years. There should be a payment schedule set for the length of the lease in advance. An important consideration is whether there is expandable space for your business. Is there a chance you will you outgrow the space? It can be hard to predict how quickly your business will grow if this is a concern. This is why a 2 year lease that has the option to be renewed may be your best bet.

Steve Walther, broker/owner of Walther Realtors moved his real estate business from his home to a converted house in 1986. The house was a former doctor’s office, with the other half used as a rented residence to balance out the costs of owning the property. “I purchased the property due to its highly visible location and the ability to convert the existing dwelling into what suited my needs. “ In 2000, Mr. Walther expanded his real estate office, created another office to rent out and made a smaller apartment on the second floor.

There is a lot to consider when you need to have a storefront for your business. The option you choose, lease or purchase, and where you choose to lease or purchase can play a huge role in your business’ success. Consider all of your options and do not settle on a location. There are many things out of a business owners control such as the economy, but this decision is all yours and may just be the reason why your business flourishes.