Expert Advice: Buy, Build or Lease Commercial Real Estate
Depending on where a business is in its growth stage, critically important decisions must be made on where to build or relocate and whether to lease space, buy existing property (and maybe renovate or remodel), or buy land and build from the ground up. Working with an experienced architect, builder and real-estate professional to assist with analyzing the options can help you make the right decisions.
During the initial discovery and pre-design phase, a road map is developed to best understand space- programming needs and priorities and provide insight on contextual aspects of a preferred site location.
Discovery phase:
In an expanding economy, company CEOs and small business owners often find themselves asking if they should lease, buy or build to keep pace with the company’s facility needs. The first step to finding the right solution is to explore the advantages and disadvantages of each option: Lease vs. Buy vs. Build. Some of the questions during this phase include:
Is the pulse or status of the local commercial real estate market conducive for leasing, owning or buying?
Is the location more important than other factors? If so, this may determine if you can only lease, buy or build in order to be in a certain location.
Does your company’s growth show it will outgrow its current or proposed space?
Are you capable of dealing with the challenges of maintaining a property?
Are your company’s liquid assets or capital such that you can tie some or all of them in commercial real estate?
Will your growth projections benefit more from a lease and its flexibility? Or will a mortgage be more beneficial due to stability?
Buying an existing property for commercial or industrial use
Once you’ve established your space programming needs and building priorities, you can better determine the best course of action for your organization. If you choose to buy an existing building, work with your architect to weigh the pros and cons of this property. Remodel or renovation work can vary in scope and cost, ranging from an inexpensive upgrade to a comprehensive remodel, which can sometimes come with a price tag that would be as costly, if not more so, than that of a new building. Having clarity in budget expectations is important. Your architect can help you keep focus on key items that need to be part of any project and determine secondary (or less important) options available for consideration when the budget will afford it.
Examples of financial benefits that come with owning real estate may include:
Depreciation benefits for taxes
Investment tax credit (historical and other tax credit options)
Sheltering income
Appreciation of value for future equity needs or resale considerations
Tax abatement zones
The owners of 100 S Kansas Ave chose to purchase this location because they wanted a downtown location with the charm of an old warehouse and adequate square footage. This new urban location, with room to grow their businesses, would also afford them opportunities to utilize various economic development benefits to offset the costs of a major renovation. The Architect One team designed a contemporary solution inside and out to celebrate the creative culture of their marketing, videography and business coaching agencies that occupy the second floor.
Choosing aspects of your project to be built by your general contractor, in lieu of independently purchased items such as furniture, fixture or equipment, can dramatically impact your opportunities to benefit from various tax advantages.
For example, the owner of a historical property could benefit from Historical Tax Credits. If utilizing State and Federal tax credits on a structure that falls within this qualified basis, the benefits can add up to considerably more than 20 percent of the value of your project in some cases.
Working with your design professional to better understand these opportunities is advantageous when looking for additional equity in the property once the work is completed. This affords you the ability to profitably sell, trade or refinance the building in the future. If you can buy a building that is already configured the way you want it to be, you are fortunate, but often this isn’t the case as all businesses have unique and individualized needs.
If you need renovations in a building that you purchase, you may very well encounter challenges. It’s advisable to have the building thoroughly inspected before you buy to uncover any real issues—such as asbestos or foundation problems. Your design team will help you understand these types of potential concerns. Regardless of the inspection, you never know what is truly inside the building until you begin demolition and can take a deeper look at the building’s structure. Having a contingency in your budget to address potential issues will give you piece of mind if problems were to arise.
Leasing an existing property for commercial or industrial use
If you are starting a new business or need to be in a building right away, leasing may be the best option. Leasing is both practical and affordable, and it is a good way to get up and running with minimal cost. You can often negotiate with the landlord for a short- or long-term lease, and the owner of the building is typically responsible for its maintenance and upkeep. In some situations, the landlord may offer a build-to-suit option where the tenant can renovate interior space to his/her required specifications.
The owner of Dialogue Coffee House chose to lease the existing shopping center location at 29th and Gage for her new café business. The right-sized square footage of the existing vacant space, competitive lease rate, excellent visibility from 29th Street and adequate parking were all important factors in her decision.
Leasing has disadvantages too
Finding the right space in the right location can be a long and daunting task. You may want to pay a commercial broker to do the legwork on your behalf. There’s also the risk of having a difficult landlord who doesn’t have your best interests at heart. Depending on your lease agreement, the landlord may have the power to raise the rent and/or the final say in what you do with the space.
If your lease is for a commercial use that requires a kitchen, such as a restaurant, café or bar, your out of pocket tenant- improvement costs can be substantial because of power, plumbing, ventilation and air requirements.
Options to consider if you are not prepared to pay for such improvements out-of-pocket include amortizing them into the lease or a loan via a commercial banking entity with experience in financing requirement for projects such as this. A typical 5-year lease may not be enough time to recoup this investment and pre-negotiation extensions to the lease that can be exercised as the first lease nears a close may help you avoid expensive increases in the base rate of the lease.
Build from the ground up
If you have the capital, the time and the patience, new construction can be the most practical and profitable over the long-term. This approach has the unique benefit of affording you exactly what you are wanting and the ability to make every decision regarding the design of the building from the ground up. Utilizing your architect and the professional design team and choosing a trusted general contractor to lead your build team can give you peace of mind regarding the quality of your new building and the warranties in place for aspects of its construction and the systems throughout. This is beneficial for establishing reliable business plans where you can anticipate your utility expenses and your deferred maintenance costs for the foreseeable future. Choosing energy-efficient features, durable finishes and quality materials allows you to think long-term in your approach as you consider the return on your investment.
The owners of the Deutscher Rottinghaus & Oxandale Optometry clinic were very methodical in finding the right location at 1140 SW Fairlawn Rd to build their new clinic. The team at Architect One helped them refine their floor plan and space programming early in the process, giving the owners confidence in their decision to purchase this location, a smaller and more visible site on a major road close to their previous location. In choosing to build new, the design focus centered on technology, efficiency and high design.
Building a stand-alone structure with efficient modern building systems affords the owner or tenant with a flexible, open floor plan.
Regardless of the space plan requirement, this is an attractive option for many business owners—especially retailers, medical practices, dentists and other service-type businesses. Their business model may change over time. The ability to inexpensively make modifications to accommodate space plan needs is critical to success.
Depending on your project’s location, and if this is an opportunity to grow and expand your existing business with new construction, explore the opportunity to use new-market tax credits, and/or opportunity zone benefits.
Your accountant can help you with how to factor depreciation on your new building investment as well as different depreciation schedules for equipment and furnishings you acquire to outfit your new facility.
As with leasing or buying an existing space, new building construction is not without its drawbacks.
New construction can take time, and you must be ready to make decisions at critical phases during the design and construction process. Your site may not have some of the necessary utilities serving it and require considerable investment to meet your needs. New construction can also be impacted by the seasons and unexpected weather. Before the building shell is completed and the interiors can be improved without hindrance from the weather, it is susceptible to rain, snow and heat, which can slow or delay progress on a job site.
Final thoughts
Building and expanding a business is an exciting time for any entrepreneur, and it doesn’t come without its challenges. Difficult decisions must be made along the way, and at times, in areas that are unknown to the owner. In circumstances that offer multiple solutions with varying pros and cons for each, relying on your design and real estate experts to guide you through the process can positive}ly impact the overall success of your company.
