Should we buy or lease office space as we are out of room. We need to decide. Staying means picking up additional space, which may be expensive. Our other option is to buy or lease. Buying will take time. Maybe rent space short-term while we work on buying? Seems complicated. Can you help?
Thoughts of the Day: Buy or lease office space has many pros and cons. Buying a building is a good idea if you can afford it. Know your company’s long term plans before you decide what to do next. Moving a business takes planning. If you can’t afford to buy now, work on a 3-5 year plan to get where you want to go.
Buy or lease your office space
Most privately held businesses don’t have enough tangible equity. When owners need leverage, they often can’t get the financing they need because there isn’t enough in real asset value available in the company. And given the slow housing market, many business owners are also struggling to prove they have equity at home that they can lend back into the business in case of need.
Financing is based on comparing debt and equity. Banks are looking for more than historical net income performance. They want to see that the business has access to cash and accounts receivable net of accounts payable and credit card balances.
Over 70% of today’s economy is comprised of service based businesses. Their primary assets, personnel, aren’t valued on the balance sheet. Combine that with reduced debt: equity ratios and a slow-to-recover economy. Lenders are much more careful about knowing what’s available to repay their loans and avoiding situations where back up funds might not be adequate.
Buying a building is one of the few purchases a company can make wherey the cash laid out immediately turns into additional value on the balance sheet. 20% cash down turns into 20% additional value on the balance sheet, if not more. Any money spent to improve the building yields an increase in the value of the asset, often a multiple of what was spent.
Build equity or cash reserves?
Before jumping on board with a plan to buy a building, make sure you know what your company’s plans are for the mid and long term. When things are cramped and you’re deciding what to do next, look at more than direct costs.
How much space will your company need in 3-5 years? Does the space you’re looking at have expansion ability, either because you can remove existing tenants, you can build out, or you can re-arrange the space to fit in more?
Planning to sell the business in the next couple years? What are the chances the future owner will want to stay in the current space? Can your space be leased to someone else if the new owner moves out?
Is the neighborhood safe for your staff to come and go at all hours? Enough parking to accommodate everyone? How convenient is transportation? Will current employees follow the move to the new location?
Will the building likely appreciate in value over the next 5+ years? Are you prepared to hire a property manager, or similar? How much space are you planning on renting out? How much in the way of building improvements has to be done within the first year in order to bring the building up to your standards?
Avoid tying up capital
Do you have enough money to pay 20% down? If now, where are you going to get that money from? How long will it take you to assemble the down payment?
Try to time your move during your slow periods. Set up a team of people to work on space planning. Decide what equipment you’ll bring with you, and what gets replaced. Take this time to replace outdated computers, phones, furniture and cubicles. Add that in to an overall moving budget and talk to the bank about funds to cover those expenses. Overestimate what you need so you don’t get caught short.
Not sure you have the funds right now. Check to see if there are funds available from the state to help. Work on a plan to put away the money you need over the next 3-5 years. Move or stay where you are and add a space near-by, to solve short term needs. Often moving accounting or sales to a new location can fix the immediate space crunch and buy you some time.
Think of building assets as job #1 for yourself as business owner. Use the business as a vehicle for building those assets. If you have to pay rent anyway, you might as well pay yourself while you get the appreciation and depreciation value of a building.
Looking for a good book? Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate, by John A. Randel.
