Lease vs Buy-- What to do, what to do?

Lease or buy? This is the question. Small businesses have difficulty raising capital - that's no secret. This difficulty (among other reasons) has caused many to look at leasing as an alternative financing arrangement for acquiring the use of assets. 


All types of leasing have become more and more attractive.

This lease vs buy analysis describes various aspects of the lease/buy decision. It lists advantages and disadvantages of leasing and provides a format for comparing costs of the options.

Office, retail and industrial building leases are very common. A building lease is usually written for a specific term and will provides that:

• Periodic payments be made,
• Ownership or possession the building or space reverts to the landlord at the end of the lease term,
• The tenant  has a legal obligation to continue payments to the end of the term, and
• The tenant agrees to maintain space (however there are different types of leases that have the landlord maintain the space, this is typical in office leases).

You may also hear leases described as net leases or gross leases. Under a net lease the tenant responsible for expenses such as those for maintenance, taxes, and insurance for the building. The landlord pays these expenses under a gross lease. Net leases are typically found in retail and industrial buildings.  Gross leases are found in office buildings.  Many of these topics have been covered in previous blogs.  Check them for specific details. 

Advantages of Leasing:

The obvious advantage to leasing is acquiring the use of an asset without making a large initial cash outlay. Compared to a loan arrangement to purchase the same office space, a lease usually

• requires little to no down payment, while a loan often requires 25-40 percent down;
• Spreads payments over a longer period (which means they'll be lower) than loans permit; and
• Provides protections against the risk of obsolescence, since the tenant can leave the building at the end of the lease.

There may also tax benefits in leasing. Lease payments are deductible as operating expenses if the arrangement is a true lease. Ownership, however, usually has greater tax advantages through depreciation. Naturally, you need to have enough income and resulting tax liability to take advantage of those two benefits.

Finally, there is one further advantage of leasing that you probably hope won't ever be of use to you. In the event of bankruptcy, claims of the landlord to the assets of a firm are more restricted than those of general creditors.

Disadvantages of Leasing:

In the first place, leasing usually costs more because you lose certain tax advantages that go with ownership of an asset. Leasing may not, however, cost more if you couldn't take advantage of those benefits because you don't have enough tax liability for them to come into play.

Obviously, you also lose the economic value of the asset at the end of the lease term, since you don't own the asset.

Further, you must never forget that a lease is a long-term legal obligation. Usually you can't cancel a lease agreement. So, if you were to close a business that leases space, you might find you'd still have to pay as much as if you had used the office space for the full term of the lease.

Look Before You Lease:

A lease agreement is a legal document. It carries a long term obligation. You must be thoroughly informed of just what you're committing yourself to. Find out the landlord's financial condition and reputation. Be reasonably sure that the lease arrangements are the best you can get, that the offices space is what you need, and that the term is what you want. Remember, once the agreement is struck, its is legally binding.

The lease document will spell out the precise provisions of the agreement. Agreements may differ, but the major items will include:

• Payment amount,
• Term of agreement,
• Who is responsible for maintenance and taxes,
• Renewal options,
• Cancellation penalties, and
• Special provisions.

There are other details to consider if you want to buy; interest rates are at an all-time low.  Lenders are interested in owner/occupied properties and can get aggressive with their rates.  However, the underwriting requirements are stringent and the down payments can be large, unless you are doctor.  Lenders love doctors.

If you are looking for more information about leasing vs buying please contact Cushman & Wakefield Cornerstone at 865-617-2989 or myself at jcazana@cornerstonecres.com

Justin Cazana, CCIM