February 25, 2011: by
To Purchase or Lease the Property When Buying a Business?
A common struggle among buyers looking for acquisitions is the decision of whether to buy or lease the real estate for their business operations.
There are pros and cons to both scenarios and here we will identify some major considerations that will aid in the decision making process.
PROS to Purchasing the Real Estate
- Long term real estate ownership allows an owner to accumulate equity via paying down the mortgage & any market appreciation.
- You are the landlord and are therefore not subjected to rent increases or property rules dictated by someone else. As a property owner you can lock in a fixed overhead cost for a facility.
- Excess space may be available for business growth or incremental income from rents.
- Potential for income tax savings from depreciation.
- Increased financing options for real estate compared to other capital assets.
- At the time of purchase, a separate real estate holding company to own the real estate can be established. When the business is sold, the real estate asset will retain any appreciated value and rental income potential in a separate holding company.
CONS to Purchasing the Real Estate
- Potentially detrimental to be tied to a facility at a specific location, that may have limited space, especially for a company in growth mode.
- A down payment, of at least 20%, is required to finance a building purchase. This may use up cash that could have been used for growing the business.
- Responsibilities of maintenance, security, remodelling and other management issues that come with property ownership.
- Personal guarantees are required for most small business property mortgages.
As with all business acquisition decisions, a prudent buyer should consult with its team of business advisors to help weigh the pros and cons of purchasing or leasing property.
It is crucial to compare the financial and legal aspects of leasing versus owning the business property. A solid understanding of the real estate value versus the business value is a necessity in making a well informed decision.
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