Guest Column: Market conditions offer benefits for commercial ownership, tenancy

In light of current bear market conditions, businesses may be more inclined to consider purchasing under the guise of “getting a better deal” than those offered during a bull market. This may not be the case, depending on the property’s location and forecasted area growth, as well as the current owner’s exit strategy.

Market conditions are important, as is the stage of the business – factors such as cash flow needs, type and size of space, trade area, franchise value, growth objectives and ability to obtain financing.

Advantages of ownership

Certainly, appreciation is a benefit that owners realize in addition to control over rental prices. Locking in a fixed mortgage enables owners to control expenses for the long term. In fact, control is often cited as a reason why businesses decide to purchase rather than rent space. Owners have the freedom to operate the facility as they see fit and to avoid the boot by landlords who may elect not to renew a lease.

Income potential is another advantage of ownership. Owners may use rent money from excess space to pay down their mortgages, fund their primary businesses or invest in other ventures. Owners also reap the benefits of any improvements made to the property.

From a tax standpoint, owners are able to deduct the mortgage interest, property taxes and depreciation. Businesses should consult with their tax advisers on additional cost-recovery opportunities that may result from commercial property ownership.

With all this said, it generally makes the most sense to buy when a business is in a mature phase and space needs are established, growth trends have leveled out and a larger cash reserve is in place.

Leaning toward leasing

Flexibility is the name of the game when it comes to leasing space. Businesses that are still exploring their space and location needs can make an average three-year commitment, after which time they are free to renew or move. Typically, a one-month deposit upfront is the bulk of the investment beyond monthly rent, whereas purchases often require a 20 percent down payment. Renting also means less responsibility with much of the maintenance burden resting on the owner’s shoulders. Renters are able to wholly focus on their core business and utilize capital to invest in business growth.

Lease payments are fully tax-deductible. If the lessee pays operating expenses in addition to rent, they are deductible as well.

Overall, leasing makes a lot of sense for startups or rapidly expanding (or contracting) businesses.

In fact, some small or marginally profitable businesses may not qualify for mortgage financing, thereby making leasing the only solution. Sometimes a lease with an option to buy allows a renter to lock in a desirable location while reserving cash for the future purchase.

Market conditions

According to an Aug. 19 article published in Financial Week, U.S. commercial real estate prices did decline in June for the fourth straight month. The article quotes Lawrence Longua, a professor at the Real Estate Investment Trust Center at the NYU Institute of Real Estate, who said, “Right now, debt is expensive, and it’s not available. No one knows what real estate is worth, so people are only selling when they are compelled to sell.”

With that being said, this is a good time for qualified buyers to take advantage of good, low rates and motivated sellers. In contrast, tenants can take advantage of the soft market and high inventory by negotiating rental rates and opt-out clauses to maximize flexibility.

John Schnoebelen is a broker associate at RB Murray Co. in Springfield. He may be reached at john@rbmurray.com.