Lease vs. Own - A Timely Reminder
Wayne D'Amico, CCIM
With the issues of "off balance sheet" investments and synthetic leases impacting corporate real estate, it is a good time to re-evaluate the impact of leasing vs. owning for the non-Fortune 500. Small business entrepreneurs face this question often with greater consequence.
A variety of factors pertinent to the individual business and owner's objectives, along with market factors, must be taken into consideration. Issues like the prudent use of available capital, flexibility of lease terms vs. the rigidity and liquidity of ownership and the issues of right sizing all must be considered. In addition, all real estate decisions should involve analysis of the basic investment principals of return -of-and-on- investment and accumulation of wealth.
Projecting company growth is a principal area to understand. If growth is on the horizon, owning might be too limiting making leasing more attractive by avoiding the prospect of wrong sizing.
Strategic lease negotiations can offer additional flexibility. Understanding the areas of negotiation can maximize future opportunities. Fair, but lessee centric terms can offer periodic opportunities for the lessee to quantify the benefits of exercising lease rights to maximize profitability and efficiency of business operations.
With available cash being an invaluable commodity to small business, tying up capital in real estate might prove stifling. Leases tend to establish fixed costs and preserve cash assets that might otherwise be invested in the business. Such operations investment can produce greater returns than the real estate investment, creating an opportunity cost of ownership.
Lease vs. own analysis is a case-by-case scenario with many factors to consider. Such a critical decision should be made in conjunction with a qualified expert in the area of commercial investment real estate transactions, such as a CCIM. With capable assistance, an entrepreneur can identify and quantify these many issues thereby optimizing their position for profitability.