Lease vs. buy Featured

7:00pm EDT December 26, 2007

Buying a commercial property for your company is a substantial investment that is influenced by a variety of factors and projections.

“Purchasing a building requires a significant outlay of capital,” says Scot Farber, Senior Vice President, Southwest Region, for Grubb & Ellis Company’s Institutional Investment Group. “Depending upon a company’s financial strength, it may be more advantageous to reinvest capital and grow the business, rather than purchase a building that might not suit your long-term requirements.”

Within the Dallas office market, the options are plentiful for companies looking to buy or lease. Smart Business talked to Farber about those options.

What are the potential benefits of owning versus leasing a commercial property?

The greatest benefit of owning is potential appreciation. Real estate can be a tremendous long-term investment, with a huge upside. Other benefits of owning property include: the realization of secondary income if part of your building is leased to a third party, avoiding fluctuations in the leasing market that may affect your lease rate and, finally, potential tax benefits from mortgage interest deductions.

A less measurable benefit of owning your own building is avoiding and really eliminating control issues that might arise with a landlord. One of the sometimes overlooked conveniences of owning a building is that you don’t have to limit your hours of operation to the owner’s specifications. If you want to keep the office open until 10 p.m., or if you want to work weekends, you can.

The primary benefit of leasing is flexibility, both financial and operational. Buying a property requires a significant investment of capital in the form of a down payment, in addition to any out-of-pocket costs that may be necessary to prepare the building for your use.

Leasing space allows you to reinvest your capital to grow your core business. Additionally, a lease commits you to a building for a set period of time, while a purchase could potentially tie you to the real estate for a long run and expose you to valuation losses.

Both leasing and buying carry tax benefits. In a commercial lease, the tenant can write off lease expenses but will not receive any long-term appreciation. If you own, you can write off interest and depreciation expenses but are fully responsible for property taxes, insurance and operating expenses.

Where do the better deals exist, given the current real estate market in Dallas?

Real estate is drive by a core ‘mantra’ — location, location, location. The best locations in Dallas command premium pricing. However, the hottest submarket may not be the right location for your business.

Typically, the high-profile locations offer greater possibilities for leasing. Downtown, Las Colinas, Far North Dallas and LBJ Freeway are a few sub-markets where the options for building purchases are limited. However, if you can operate your business from a secondary location, there could be solid options to lease or buy that make sound financial sense. In other words, there may be opportunities to buy a building in or near your desired location that can save you money when compared to leasing space in the same area.

As one of the country’s largest office markets, Dallas offers tenants properties in all ranges and sizes. Buying or leasing, large or small, there is most likely a property available to accommodate your needs.

How do you, as a commercial real estate consultant, advise potential clients?

The recommendations of a real estate agent or consultant are going to depend on your objectives and long-term business plan. Five-, 10- and even 15-year business plans will greatly impact his or her recommendations.

A real estate consultant would take into consideration what’s happening in the leasing market currently and in the long run. Most tenants sign leases for three to 10 years [five- to seven-year leases are the norm], and so there is a great deal of planning required to ensure that long-term requirements are met by today’s decisions. Base rental rate, building operating costs, market and submarket growth, proximity to employment pools, and leasing incentives are just a few of the factors that go into a considered recommendation from a real estate professional.

SCOT FARBER is Senior Vice President, Southwest Region for Grubb & Ellis Company’s Institutional Investment Group. Reach him at (972) 450-3251 or Scot.Farber@grubb-ellis.com.