A Commercial-Free Examination of the World of Commercial Leases

Nov 3, 2020

A Commercial-Free Examination of the World of Commercial Leases

While some small business owners are able to operate out of their homes, many are required by the size or structure of their operations to get a commercial space. This can be accomplished by either buying or leasing the property. With a purchase, you would either pay for the property up front or finance it with a loan. Leases, on the other hand, are less permanent. You rent the space for a certain period of time, often in the range of 3–10 years.

If your business needs a commercial space, you will likely have many options to choose from. Whether you live on the East Coast, West Coast, or somewhere in between, there are many factors to consider.

“Have you ever walked through a major city and counted all the different commercial property types?” asks Forbes. “There are gas stations, hotels, strip malls, apartment buildings, industrial buildings, municipal buildings, office buildings, funeral homes, churches, synagogues, cemeteries, and more. Yes, cemeteries! Did you know that grave plots are sold by the inch? They are commercial real estate too. Commercial investment properties range in size from a small, single-story, 750-square-foot office building to the Sears Tower in Chicago that is 4.5 million square feet. There is no other investment that I know of that gives you 4 types of income over time: rental income, rental increases, appreciation, and saving on your taxes with depreciation.”

This wide range of possibilities means you’ll need to do your due diligence before signing any type of agreement. The experts from SCORE recommend that you ask the following questions to ascertain whether a property is a good match for your business:

  • How large or small an area do you need?
  • Do you need walk-in traffic or simply industrial space?
  • Do you want an anchor store nearby?
  • What amenities do you desire?
    • Air conditioning/heating
    • Elevators
    • Windowed offices
    • Conference room
    • Private restrooms
    • Kitchen
    • Wi-Fi

Based on your responses to this quick checklist, you can begin the process of narrowing down your options. You’ll also want to decide if you’re going to purchase or lease the property.

There are some clear benefits to buying a property, though the need for a down payment makes it more of a financial burden for most business owners. Luckily, small business loan options can help you secure the money you need without risking a cash crunch.

“Commercial real estate isn’t cheap,” advise the real estate experts from Small Biz Rising. “If you’re a small business owner who’s considering buying or further developing commercial real estate—whether that’s an office building, a shopping center, a hotel, or another business-related property—odds are you’ll need to secure financing from an outside lender. In most scenarios, that usually means applying for a commercial mortgage loan.”

If you can get approved for a loan, the process of buying a commercial space suddenly becomes much more attainable. The benefits of purchasing include:

  • Gaining a valuable asset
  • Developing equity in the property
  • Freedom to alter the property any way you desire
  • Ability to rent out a portion of the property for extra cash
  • Potential tax breaks

On the flip side, there are disadvantages to buying a property. These downsides include bigger expenses from the get-go, the need to acquire liability insurance, and the risk of the property’s value declining.

Now let’s look at the pros and cons of leasing a property for your small business. Here are some of the advantages you’d likely enjoy with this option:

  • Option to vacate the property once the lease ends
  • More money available up front
  • Tax deductions
  • Fixed property costs for the duration of lease
  • Ability to get into a space you couldn’t otherwise afford
  • Possibility of maintenance being provided by the owner

Of course, it’s not all glitter and rainbows with a commercial lease. Some of the disadvantages are unsurprisingly the inverse of the benefits of purchasing. For example:

  • No equity to build
  • No benefit from the property as an asset
  • Lack of control over the space

You’ll need to consider all these variables before deciding whether to buy or lease your space. This is a great time to seek insights from your accountant, as they can inform you of potential tax strategies related to either approach. The resulting financial outlook could reveal a clear winner and expedite the decision for you.

It’s also recommended that you consult with your business mentor. Talking to a seasoned entrepreneur who has both owned and leased can illuminate some of the nuances you wouldn’t otherwise encounter until after making your decision.

About the Author

Grant Olsen

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

See all articles by this author

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