The location of your small business is a critical determinant of its success or failure.

Factors such as accessibility to customers, vendors, and employees, proximity to competitors, and zoning restrictions are essential considerations. Once the optimal location for your business has been identified, the subsequent decision is whether to lease or purchase the commercial space. Several key issues must be evaluated before making this significant decision.

Financial Considerations

Purchasing a commercial property typically requires a substantial down payment, ranging from 10% to 40% of the property’s value. However, if your business is already successful and you possess sufficient cash reserves to cover the down payment and several months of mortgage payments without depleting your cash on hand, purchasing a commercial space may be advantageous. Ownership allows your business to benefit from the property’s appreciation, particularly in areas where property values are rapidly increasing. Additionally, if the commercial space exceeds your business’s operational needs, you can generate additional income by leasing part of the space to another business.

Conversely, if your business is in its early stages or if you have limited cash reserves, leasing commercial space may be a more prudent option. Leasing ties up less of your cash, and there are generally fewer unexpected maintenance costs and lower risks of unforeseen expenses, which are often the landlord’s responsibility. Furthermore, rental payments are typically consistent from month to month during the lease term, providing greater certainty in budgeting. This stability allows you to reinvest your cash into your business, focusing on growth. However, it is important to note that monthly lease payments, which often include insurance, taxes, utilities, and maintenance costs, are likely to be higher than mortgage payments on a comparable property, and you will not have the opportunity to generate additional income by leasing excess space.

Flexibility Requirements

If your business is experiencing growth or contraction, a lease may offer the flexibility to relocate to a different size commercial space at the end of the lease term without the need to sell a property. Including a clause that permits subletting or assigning the lease provides even greater flexibility if your business needs to move or if you need to sell your company before the lease expires. Additionally, qualifying for a lease is often easier than securing a mortgage for commercial space, expanding the range of available properties. Leasing may also enable you to afford a space in a desirable location that would be too expensive to purchase.

However, if you anticipate that your business will remain in the same location for at least seven to ten years, have equipment that is difficult to move, or plan to make substantial renovations to the leased property, purchasing may be more advantageous. In such cases, if purchasing is not financially feasible, negotiating a long-term lease can allow you to recoup the investments made in the property.

Control Over the Property

Leasing a property requires negotiating with the landlord for any renovations or reconfigurations of the commercial space. Upon lease expiration, the landlord may increase the rent, and depending on the lease terms, you may be obligated to continue payments even if your business ceases operations, unless an early termination clause is included.

Ownership of the property grants you the freedom to make changes that benefit your business, provided they comply with local regulations. You will not have to worry about rent increases at the end of the lease term or the possibility of being required to move if the lease is not renewed.

Lease Agreement with an Option to Purchase

A lease agreement with an option to purchase can be an excellent choice for some business owners. This type of agreement allows the lessee to buy the leased property at the end of a specified term, with a portion of the monthly rent credited toward the purchase price. It provides business owners who currently lack the necessary funds to purchase a desirable property with additional time to save or improve their credit rating. However, it is important to discuss potential tax implications associated with an option to purchase.

Davis Law Group Can Help

The decision to lease or purchase commercial space for your small business depends on your unique circumstances. Our experienced business attorneys can provide guidance on the pros and cons of each option and ensure that your lease or purchase agreement includes all necessary terms to protect your business. Contact us today to schedule a meeting.