Buying vs. Leasing Commercial Property – Navigating the Pros and Cons and How to Secure Funds

Growing your small business with a bigger or better location can make a world of difference. Discover the benefits of buying and how First National Bank and Trust can help.

Whether you already have a small storefront location or dream of opening your first, understanding the difference between buying and leasing is probably the biggest decision small business owners will make.  First National Bank and Trust (FNBT) is here to break it all down and show you how we can help you secure the right commercial loan.

FNBT has been a trusted community bank in Southern Wisconsin and Northern Illinois for over 140 years. We understand what it’s like to grow and expand, so we always bring the best customer service and understand the needs of our customers.

Get in the Know with Zoning Laws
Before you consider opening a commercial loan application, you must understand the importance of zoning laws, especially if you are a first-time business owner. While they may seem like a burden, zoning laws are meant to ensure a neighborhood is livable and preserve property values, among other things.

The main general zoning categories are:

• Residential
• Industrial
• Commercial
• Recreational
• Agricultural

Because each category has its own nuances and restrictions, it’s best to hire a lawyer to help you understand which is best for your small business. The last thing you want to do is purchase a location or sign a lease agreement to later find out you can’t operate your business there!

Check Your Finances
Before getting into buying vs. leasing, we strongly recommend reviewing your finances. While leasing may require smaller upfront costs, it’s best to consider how much cash flow and capital you have for a down payment. Typically, between 10%-40% of the property value is required, so make sure you can cover the costs.

If you haven’t already started an annual review of your finances, take a look at the reasons why having an annual review with your business banker is essential. This review not only helps you bank more efficiently but also ensures you’re taking full advantage of all available benefits like BaZing Business Benefits for discounts and insurance perks. After your review, contact a FNBT business lender to discuss buying vs. leasing for your business.

You may even want to consult a local tax expert to see what tax benefits you may be able to take advantage of if you buy. For example, improvements to the storefront and upgrades to electrical systems or HVAC could potentially be deductions, something you could claim if you leased.
 
Consider Your Store Needs
Do you want a large storefront with big windows to entice customers? What about storage for inventory or even space for manufacturing? Is location most important to you? These are all important items to consider before you connect with a broker to view properties.

The experts at Retail Works, a Wisconsin-based, woman-owned consulting firm, have a great blog that gives guidance on considerations for a store location. They provide business owners great tips for how to make their storefronts attract customers.
 
Research the Market
Conducting real estate market research in the areas where you are considering having your business is important to determine if you prefer to buy or lease. A healthy market with stable or predicted higher growth could mean a greater investment if you buy.  Consider factors such as population growth, home and commercial values, and taxes; you might find that buying is the better option in the long run.

You should also look at recent commercial purchases that are like what you are looking for. Doing this research could be helpful when negotiating a purchase because you will know what other businesses paid and get a good deal.
 
Buying Vs. Leasing
Now that you’ve established a budget and store needs, it’s time to understand the key difference between buying or leasing your property. If this is similar to a car or a home, do you want security and equity of ownership, or do you want to simply pay for space and not consider the return on investment? It’s a lot to consider.

Leasing Pros

• Lower upfront costs with no down payment or closing costs
• Consistent monthly payments allow you to stick to a budget
• Options for either short or long-term leasing options could give your growing businesses more flexibility during growth, or slow periods
• Maintenance is the responsibility of the landlord, leaving you more time to run your business
• Lease payments could be tax-deductible in some instances

Leasing Cons

• No opportunity to build equity in the property as your business grows, missing out on any appreciation of value
• Limited control over the property means you would need your landlord’s approval to make any updates, improvements, or adjustments to your store
• Changes in property values could mean higher rent when initial lease agreements end, negatively impacting your bottom line
• Landlord might not be efficient with addressing issues or repairs

While leasing might seem like a good option, you need to be prepared to have less control of your property and are at the mercy of how good, or bad, your landlord would be at properly maintaining the property.
 
Buying Pros

• Build equity over time while your business grows
• Greater control of the property allows you to make improvements and investments that could increase the value, giving you more equity in the long run
• Generate rental income if your property has space for another tenant or has residential space, allowing you to offset costs
• Tax benefits such as depreciation deductions and mortgage interest deductions can help when you file

Buying Cons

• Higher upfront costs could tie up capital if not properly budgeted
• Responsible for the cost of all repairs and maintenance
• Less flexibility to move your business should you decide to sell or relocate

Purchasing might seem like a larger financial burden upfront, but owning your own store or office can bring greater financial returns, considering the equity and possible tax benefits in the long.
 
Connect with First National Bank and Trust
When you feel you’ve done your research and you are ready to take the next step, connect with a FNBT business loan specialist today to get started. They can help you review all of the options and products, including Equipment Loans and Lines of Credit if needed, so you can start growing your business.

Still not sure if you’re ready to decide or want some more insight into business loans? Take a few moments to read what you need to know about securing a business loan.

FNBT is always here to help your business grow and succeed. See all of our business products, and give us a call at 800.667.4401.