Determining whether to own or lease your company’s real estate and/or equipment can be complicated — and you don’t want to make a decision that negatively impacts your organization.
“Typically, if the item has a short life like computers, business owners should consider leasing,” says Santiago “Chico” Perez, SBA Sales Manager at California Bank & Trust. “If not, and they have the money to put down, buying usually makes more sense and saves money.” The size of the company doesn’t matter as much as having the necessary down payment, he says. In the past, a lot of small companies just didn’t have that cash. Recent trends, however, show that more businesses today have the cash on hand to buy real estate or equipment.
“Typically, if the item has a short life like computers, business owners should consider leasing,” says Santiago “Chico” Perez, SBA Sales Manager at California Bank & Trust. “If not, and they have the money to put down, buying usually makes more sense and saves money.” The size of the company doesn’t matter as much as having the necessary down payment, he says. In the past, a lot of small companies just didn’t have that cash. Recent trends, however, show that more businesses today have the cash on hand to buy real estate or equipment.
Smart Business spoke with Perez about the advantages to each method — owning and leasing — and how interest rates and real estate prices factor in.
What are the advantages to owning your commercial real estate?
If you own your commercial property, you can eliminate exposure to market increases for rental expenses. You also are able to use it as a long-term vehicle to build equity in an appreciable asset. The business can control operating costs as they pertain to occupancy expenses, and owning provides a tax deferral to current income through depreciation of the fixed asset. Banks can offer both owner-occupied financing, as well as multi-family and commercial financing.
Why might it be better for business owners to lease?
If you lease real estate, it allows the business and owners to retain capital for short and midterm expenses. The company has more working capital that can be put to use growing the business, often for higher ROI. If the company is growing rapidly, you also may have additional space needs that require flexibility in location and size. In addition, any instability and fluctuations in the local real estate market are borne by the landlord.
How can a company know when to buy — or not buy — equipment?
It’s better to take ownership for long-term life equipment with little technology obsolescence, such as office furniture, large manufacturing equipment with limited electronics, etc. There also are tax incentives to owning equipment, by way of accelerated depreciation that can benefit a highly profitable enterprise. Keep in mind, however, that if you purchase equipment through ownership, it requires a higher equity injection, which reduces your working capital to support growth. Equipment with high technology changes that make it obsolete in a few years, usually less than five, is better to lease.
Examples
include computers and their accessories as well as electronics. This in turn allows the lessee the ability to return older equipment without a penalty at lease termination. You can work with your business banker to review specific objectives and design a lease that works for your needs. For instance, terms can vary with possible early buyout options available in case the company’s needs change. Also, your lease payments are deductible on your income statement, and they don’t impact the balance sheet if the lease is an operating lease.How do you advise business owners who are concerned about possible interest rate increases? Should that play into the decision?
Interest rates have been, and are, at all time lows — but this won’t last. Most leases are at fixed rates, and interest rates definitely should play into a borrower’s decision.
Are other outside market forces impacting own versus lease in California?
Real estate prices are high and on the rise because of the lack of inventory and businesses being flush with cash. This helps industries with cash to buy, but others without cash may be forced to lease. Wherever you want to take your business, you’ll need to consult with your banker to find the right solution for your real estate and equipment needs. That expert financial guidance is invaluable when weighing the pros and cons of owning versus leasing. ●
Santiago “Chico” Perez is SBA Sales Manager at California Bank & Trust. Reach him at [email protected]
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