Rent or Own?

May 9, 2012

Sacramento commercial lawyers would all agree that there is no one-size-fits-all solution. Every business model has unique location considerations, seeks different types of clientele, and has varying amounts of capital with which to work. A Sacramento commercial real estate attorney may be the best resource for determining what it best for your particular business model.

For those just starting a business, leasing may be the only option since there may not be enough initial capital to post a down payment on a commercial space and to maintain a mortgage thereafter. For those with enough capital to choose between purchasing and leasing, however, many Sacramento small business attorneys will tell you that leasing may actually be the more attractive option.

The primary benefit of leasing commercial property is the flexibility it affords the business owner. Leases are most often written for one-year terms, with some ranging from as little as six months to two or more years. Regardless of the lease term, leasing typically locks in the business owner to a particular commercial property site for a shorter period than ownership of the property would. The advantages of this flexibility are particularly appealing to those who are just starting their business, as a lease is far less risky than the purchase of commercial property in the event that the business does not reach its desired profit potential. Further, the flexibility of leasing keeps the business owner from becoming too invested in a property in the event the business wishes to expand. It is easier to finish a short lease term and then move on to lease a bigger space than it is to sell an existing space and purchase a newer, bigger one.

The other advantages of leasing commercial space are similar to the advantages of leasing residential space. Business owners who elect to lease are typically not responsible for the everyday maintenance of the space or its surrounding areas. If something happens beyond a commercial tenant's control, many find comfort in the notion that a property manager is responsible. From a purely financial perspective, lease rates more closely mirror the fair market value of the commercial property at a given time, whereas those who purchase commercial property do so at the fair market value that existed during the purchase. As a result, those businesses who have been renting during the recession have often benefitted from lower lease rates, while owners of commercial property have seen their property values plummet.

The foregoing advantages of leasing should not entirely eliminate the option of ownership. The primary advantage of owning commercial property is the freedom to use the property as the business sees fit. Commercial leases often contain "use clauses" that can limit what activities are permissible in the leased space. For some types of businesses, the inability to engage in certain activities within the leased premises can really inhibit the growth of the business.

Owning one's own commercial space also enables the business to accumulate wealth in the form of equity in the property, not unlike a homeowner accumulates equity by paying into their mortgage. Some business owners insist that it is wasteful to "throw away" lease payments without acquiring some form of permanent interest in the property.

As mentioned before, the decision to rent or own commercial property is a matter of personal preference and opportunity. Your Sacramento commercial real estate lawyer can help you determine which option is right for your Sacramento business.