Commercial Property Decisions: Investing Smart - Buy or Lease?

Commercial Property Decisions: Investing Smart - Buy or Lease?

For a business owner, deciding whether to buy or lease a commercial property can be challenging. Leasing options have grown throughout time, making renting business property an increasingly appealing alternative to ownership, which may have previously been the sole option.  

Commercial property refers to real estate used for business or income-generating purposes. This includes office spaces, retail stores, warehouses, and industrial facilities. Unlike residential properties, commercial properties are primarily focused on generating revenue.


1. Location Needs

Your company's ideal location will rely on the nature of your industry, your target market, and your unique requirements. This may then determine whether you should purchase or rent a commercial property. For instance, if you require Class A office space, renting a commercial property is probably the best option due to the high cost of purchasing a place. However, you can think about buying if your location will eventually need to be in a specific area.

2. Needs for Operations

Your operational requirements will define a lot of your location requirements. You'll have more options to buy or lease a business property if you don't need specialized renovations. If so, you might be able to find suitable business property for rent at a very reasonable price. There will be fewer possibilities to lease a home, though, if you require specific modifications, need more control over the property, or have dangerous items. So, if you intend to stay in a place for a long time, purchasing a commercial property can make more sense.

3. Commercial Stage

Due to the high upfront expenses, very few startups or early-stage enterprises can afford to buy a commercial building. In order to qualify for a commercial mortgage in Canada, a building investment must have at least 20% down in addition to additional requirements that most newer enterprises are less likely to achieve.

Growing companies should think about their future space requirements because renting a commercial property is more flexible in the medium term. Additionally, expanding companies should think about the opportunity cost (see below) of purchasing versus spending the funds in expanding the company.

4. Opportunity Cost

The decision to purchase or lease a business property will depend on a number of potential trade-offs. The CCIM Institute advises you to conduct a thorough financial study of the cost vs. benefit of purchasing vs. leasing a business property in an article that models the costs and advantages of ownership.

For instance, a larger down payment is required when buying a commercial property than when renting one, which results in a higher upfront cost. The corporation now has less money available for other uses as a result of that payment.

5. Owner Investment Objectives

When considering whether to purchase or lease a commercial property, the owner of the business should also take their long-term investment objectives into account. The majority of small business owners invest a sizable portion of their capital in their company. Real estate ownership may make sense as a means of investment diversification for some owners. The benefit of this sort of investment is that it allows the owner's current investment in the company to be leveraged into rising equity in a commercial property. There can also be a chance to become a landlord and generate additional rental income, depending on the property.

6. Regarding Taxes

Different expenses are written off for leased versus owned business property. For leased property, the entire lease payment is often incurred. On the other hand, the only costs associated with the company's commercial real estate are interest and depreciation. These variations may result in higher income taxes for businesses that own their property as opposed to leasing it.

Despite this, there may be ways to reduce the tax burden for businesses that own their properties. With its larger revenues, the operating business might benefit from a leasing deduction if a holding company owns the property and rents it to the operating company. The holding company then offsets lesser revenues with the interest and depreciation deductions.

7. Liabilities and Extra Charges

Having a commercial property comes with extra responsibilities. You might not want to assume these additional liabilities that come with owning a commercial property, depending on your company's situation:

Zoning: You must be informed of the zoning rules that apply to the space you are renting when you wish to rent a business property. When you own, you must be knowledgeable of any laws that might be relevant to the complete property. Additionally, even prior to the ownership change, you can be accountable for removing any work that was done without a permission.

Liability protection: Costs could be higher because the entire property needs to be secured.
Additional maintenance expenses: If you were a tenant renting a commercial property, your landlord might be responsible for paying additional maintenance expenses including structural and mechanical upkeep.

Interested in Calgary Real Estate?

Kuldip Singh Parmar
Kuldip Singh Parmar
Balpreet Tehri
Balpreet Tehri
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