Leasing or Buying Your Business Location
Many factors will go into the decision on locating your business. For example, if you are planning a retail business, you most likely want easy access for customers. Or, if you are in distribution or manufacturing, you will want a workable setup for equipment and product delivery and shipping.
Most new businesses rent, or lease, their facilities, so the discussion here will focus on the legal aspects of leasing. There are, however, some solid reasons for buying a space.
Why purchase a business facility?
Leasing has many advantages in terms of maximizing cash flow and the ability to change locations, but buying offers opportunities to consider. Some reasons to buy are:
- You are confident that the business will be in the same place for years to come, and you expect to make alterations to the property as the business grows and changes.
- You believe the value of the property will grow over time, and, measured against cash flow and actual lease cost considerations, the business should benefit from appreciation of the property.
- Tax considerations may encourage a purchase. Rent is deductible for tax purposes, and it is a cash outlay. Depreciation is not a cash outlay, but it is deductible for tax purposes. Interest payments from financing a purchase are also tax deductible.
- More control and flexibility in making decisions about the property will be available without the need to accommodate the lessor or landlord.
What are the advantages of leasing?
Especially when starting out, business owners see the advantages of leasing versus buying a business facility. Some key considerations in making that decision include:
- There is less up-front cash required with a lease. Cash is preserved for other needs of the business-sales and marketing efforts, hiring employees, buying equipment. Rent is deductible for tax purposes.
- Unlike a typical residential lease, terms of a commercial lease are open to negotiation. You can decide what is important to you and work with the landlord to accommodate the needs of your business.
- Maintenance can be shifted to the landlord. This includes routine concerns such as landscaping or snow removal. It could also apply to building repair and upkeep.
A lease means there are periodic opportunities to reconsider and move on to another space.
What should I look for in a commercial lease?
The amount of rent is usually calculated per square foot. Commercial real estate brokers can help by giving you the average price per square foot for similar properties, and rents for larger properties are often published.
The length of the lease is a factor. Can you sublease? What is required to terminate the lease early?
Another area to check is the description of the area you are renting. Does it fit with your verbal understanding with the lessor?
How can I make sure a leased property will really suit my business?
Be sure to read the lease carefully and think through the details as they apply to your business. What will the landlord do in the way of maintenance? What restrictions on signage might discourage customers or make freight deliveries difficult?
What are some features of commercial leases?
A commercial lease is a legal document, enforceable in a court of law. Because commercial leases are tailored to specifics of the business and the facility, they are not standard documents. Terms are negotiable.
The fact that commercial leases are not standardized gives the business owner opportunity to structure terms that support the business. A "build out" that tailors the property to the lessee's specifications may be included as part of the lease.
Commercial leases tend to be long term-10 or 15 years-and it is difficult to break them. Over time, the amount of money involved can be significant.
There are no tenant advocates as you might find in a consumer lease situation. For these reasons, it is important to make sure an experienced third party, most likely a lawyer, reviews the document.
Do I need to worry about zoning if I am moving into a space that has been occupied by a similar business?
Yes, you need to check the zoning, and you should not count on the existing business or landlord to advise you on this. If the zoning rules have changed, the current business might be "grandfathered" in-that is allowed to continue their business as long as they stay, but the new occupant must adhere to the new zoning rules.
It is unlikely that you will avoid the scrutiny of your local government when you move into a new location as you will be applying for business permits and licenses that will trigger a zoning review.
Should I just hire a commercial broker to find a facility for my business?
A commercial broker knows the territory and current pricing and can be a great asset in your search for a location. You might also want to check for economic development zones, small business incubators and other government-sponsored programs that help businesses find appropriate locations.
Will the landlord take care of the "Certificate of Occupancy"?
Many cities require a Certificate of Occupancy or a similar document that shows a building confirms to city requirements. For example, in Chicago, there are three types: covering a full building, part of a building or a temporary certificate for a special event.
Checking the Certificate of Occupancy will tell you that the building meets local building codes as well as the kinds of uses permitted for the building.