No matter what kind of business
you’re in, you’ll likely have to
decide whether to lease office space or buy a building.
“The pros for buying an office building
are similar to the rationale when deciding to rent or purchase a home,” says
Patrick Burns, business banking vice
president at Plano-based ViewPoint
Bank. “Similar to home ownership,
owning the building in which your business resides requires serious considerations. These include future price appreciation, cash flows and down payment
costs.”
Smart Business spoke with Burns
regarding the benefits of owning your
own building versus staying in your
lease.
Are there certain types of industries
— or business circumstances — that
make it more advantageous to lease
space rather than buy?
Yes, there are. It’s typically a disadvantage to buy when a business has
sales under $250,000 a year. Banks
require the debt service coverage ratio
to be 1.25 cents on the dollar.
Therefore, if you have a $5,000 mortgage payment per month, the bank will
want to see cash flow of $6,250 or more
in order to cover the mortgage payment. In other words, your cash flow
needs to exceed payments by 25 percent.
Other businesses better off leasing are
start-up service businesses, such as
attorneys or other professionals. These
young professionals are usually saddled
with higher education debt and don’t
have the cash flow or savings to make a
down payment on a building. Also,
there are many other attractive options
— such as leasing an executive suite
with an assistant. It is best for these
businesses to get a few years under
their belts before purchasing a building.
Another reason to continue leasing is
to allow your business to be scalable.
Companies that own buildings and are
letting employees go can have a more
difficult time and may have to either
sell the building or sublease the extra
space. Those renting will simply need
to pare down their office space.
When should a business owner make the
decision to buy a building?
The best time to purchase a building is
when a business owner has a good cash
flow and money in the bank to make the
down payment necessary for the purchase. For example, if a building is selling for $500,000, the owner will need to
put 20 percent down — or $100,000. Do
you have that kind of cash, plus some
left over for cash reserves? The answer
should be ‘yes’ in order to approach a
bank for a commercial mortgage loan.
Also, a business has to have a strong
positive cash flow to make the mortgage payment and cover taxes, insurance and maintenance costs. That said,
tax deductions and appreciation can
make this overall monthly cost less of a
burden than renting. For example, if a
business owner is paying $5,000 a
month leasing office space, it is comparable to a $523,000, 15-year 8 percent
mortgage payment. If a business owner
finds a building that costs $500,000 and
puts $100,000 down, it will be a
$400,000 loan. The monthly payment
would be approximately $3,800, equivalent to $1,200 a month in savings. When
the business owner deducts interest
and other costs, the monthly out-of-pocket expense to own the building is
even less.
Are there other advantages to purchasing?
Yes, buying a building automatically
gives you a second business in real
estate investing. This is particularly
advantageous to small business owners
who may need the perks accompanying
ownership that large companies have,
such as 401(k) programs. The building
loan, as it decreases in debt, can be
viewed as a retirement savings vehicle
for the owner. Also, there are a variety
of options available to the business
owner at retirement. These might
include selling the office building, providing a lump sum benefit upon the sale
and leasing the space, which provides a
stream of income. Another advantage
has to do with the business owner’s
American dream: to see a building with
his or her name or business name above
the doorway. Of course, owning the
building as a financial property is the
largest perk; however, there is a lot of
pride in owning a building on which you
can’t put a price tag.
PATRICK BURNS is vice president, business banking at Plano-based ViewPoint Bank. (www.viewpointbank.com) Reach him at (972)
801-5859 or [email protected].
