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To Buy or Not to Buy

617  By Kathy Henderson, CCEDC Director of Economic Development

To buy or not to buy that is the question every business owner asks themselves.  Is it better to lease my space where I can grow my business without the headaches of owning the property or purchase a building where I can grow equity in the real estate?  

Cash flow is the biggest concern of every business.  There are so many unknowns out there that purchasing the space to run your business may not be the best way to go…yet.

Owning real estate can be a great investment if you’re ready.  You can grow equity and have something tangible to show for it but when you’re just starting out you may not want or need the added stress of a large mortgage payment on top of trying to get your business off the ground.  There’s a lot of responsibility that goes along with owning a building.  

Startups may do better leasing when they start out in order to save money and build up their cash reserves.  The first three years of a business are usually the hardest cash flow wise.  The rule of thumb is to have a minimum of 6 months operating expenses in reserve for unforeseen events.

Leasing a space can give you more flexibility when it comes to judging the best location to establish your business.  You will be building a payment history and if you outgrow the location or need to find that the space just isn’t working for you, you can usually move.  

Another option is a lease-purchase agreement.  This is where a portion of the lease payment or rent is applied to the purchase price of the leased property.  When the full “sale” price is paid to the property owner or landlord, the title is transferred to the buyer or tenant (lessee).  This type of arrangement can be an option for new businesses as they don’t have the financial history that is necessary to obtain a regular mortgage.  

You also need to make sure there is a way out of the transaction so that if your business fails you are not stuck with a long-term obligation. Hire a good real estate attorney to draw up an agreement that is beneficial to you and your business and contact your financial advisor to see what your tax exposure will be in this type of scenario.    

The other issue is zoning.  Make sure before you sign anything whether you are leasing or purchasing that the location is properly zoned for your business.  If it is not zoned for what you want to do, you will have to go for a variance.  This can become costly and time consuming for your business and set your timeline back.

Whatever path you decide to take, make sure you have good advisors around you to protect your exposures and think with your head and not your heart.