At some point, every tenant wonders why keep paying rent when I could just buy a building?' While ownership may have some monetary advantages, it only makes sense for a small percentage of companies. When we consult with companies interested in buying or owning instead of leasing, we ask these questions:
DO YOUR BUSINESS PROJECTIONS INCLUDE CONSISTENT SPACE REQUIREMENTS FOR THE NEXT 10 YEARS?
NO. Because of the acquisition and disposition costs of owning commercial property, it's difficult to get a reasonable return on investment without holding property at least 8-10 years. If you expect your space needs to fluctuate significantly, you'll either have to (1) build in expansion space and pay the related costs until your company grows into it or (2) be forced to move prematurely because the facility is no longer big enough. Either way, your ROI suffers.
YES. On to the next question.
ARE THERE FUNDS FOR THE DOWN PAYMENT?
Most lending institutions require a 20% down payment on commercial investment properties. You can sometimes reduce this number, but not without an added cost that lowers your rate of return. Try this simple test:
Project square footage needs for 10 years;
Multiply by $120 on the low end and $180 on the high end (cost of the property, plus closing costs and initial interior modifications); then
Multiply the result by 20%.
DO YOU HAVE THOSE FUNDS?
NO. Purchasing is not right for you, at least not now.
YES. On to the next question.
WHAT IS YOUR COMPANY'S INTERNAL RATE OF RETURN (IRR)?
Even if you can get the down payment, what's best for your business? Historically, the majority of commercial real estate investments return 7% to 11%. Most companies, especially those that are new, introducing new products or services or in a growth phase, realize a much higher IRR. (High volume/low margin operations are usually lower.) If you can make more money investing in your business, why invest in real estate?
IS YOUR COMPANY'S IRR HIGHER THAN 11%?
YES. Invest in your company and not in real estate.
NO. On to the next question.
SHOULD YOU CARRY LONG-TERM DEBT ON YOUR BALANCE SHEET?
Regardless of how attractive a real estate investment might be, some companies don't want to include long-term debt in their financial statements. Do you?
YES. Let the landlord carry the debt while you write off facility costs as 'expenses.'
NO. On to the next question.
WANT TO BE A LANDLORD?
The question is 'can you afford to be a landlord?' Running a building, especially if you have other tenants, involves time and effort which you probably don't have. Facility, leasing and management companies cost money and reduce your IRR projections.
NO. Let the landlord change light bulbs and hire repairmen.
YES. You're a candidate for buying a building. If so, Leasecorp can help you purchase one. Our patent pending Space Sizing Program (SpaceLink®) helps project space requirements at occupancy or any other point in your projected holding period.
WE DO MORE THAN NEGOTIATE LEASES.
We're also a design firm. We can help you generate your space plans and architectural drawings. And our construction manager will oversee the project to insure the construction project runs smoothly, on time and on budget.
