For Sale Or Lease?: Pros and Cons of Buying vs. Leasing Space for Franchise Tenants
Whether you purchase or lease commercial space is one question. Whether you can find good commercial space to purchase is another matter unto itself. Although commercial property purchasing options exist across the country, they are less abundant than leasing opportunities. It is my opinion that, the better the location you need for your own business, the less likely you will be able to find a suitable space for purchase.
I remember one client tenant who had just moved and wanted to lease commercial space. He was contemplating whether to lease commercial space or buy a location outright. We went through our standard site selection process and produced a number of excellent locations both for lease and for sale. The end result was the purchase of a three-story business condo. What made this particular property unique and ideal were the living quarters situated on the condo's top floor - a perfect set-up for the tenant - the basement could be used for storage, the main floor was for his business and the upper floor could be used as a residence for this tenant to live in.
I have worked with hundreds of business owners and franchise tenants on both their new leases and renewals. Many entrepreneurs occasionally dream of purchasing or constructing their own building or property. The main reason that dream cannot, or does not, come to be is this: more than 98 percent of all commercial, retail, and office space is for lease, not for sale. Yes, it's that simple. Many good locations suitable for a business such as enclosed malls, strip plazas, and street front office space are already owned by a landlord who does not want to sell you the property, but rather wants you as a long-term, rent-paying tenant.
Would more business owners own their own location if they could? I believe the answer is yes. But unless you are willing to move from your current leased premises to a lesser location, the average business-owner cannot find a suitable purchase or construction opportunity.
Now, if you are in the enviable position to consider purchasing a site, here are just a few of the pros and cons to consider regarding leasing versus purchasing commercial, retail, or office property:
- Pro 1: It is better to pay a mortgage than a lease because eventually you will pay off the mortgage whereas lease payments are forever. More often than not, the monthly mortgage payment is also very close to the monthly rent payment.
- Pro 2: Your equity in your property will increase over time. I have since visited this tenant at his location. With gratitude, he told me that he could now sell his business condo for about three times more than he paid for it originally. This does not include the value of the business, just the real estate. Obviously, appreciated value will vary from location to location and city to city.
- Pro 3: You don't have landlord hassles; you feel in control and can open and close your business when you want. Yes, ownership is empowering and it feels great (most of the time).
- Con 1: You might have to sacrifice on location strength or desirability. Many of the ownership opportunities are in secondary locations and not on the busier streets. If you are relocating your business or franchise into a secondary location for purchase it's not so bad because you may have loyal customers who will follow you.
- Con 2: You would have to move out or away from your current space giving up a well-established location that a "competing tenant" might lease and move into. Landlords almost always try to replace one industry tenant with another so the possible competition should be a potential concern to you.
- Con 3: You may have to become a handyman or deal with various ownership issues like heating, ventilation, and air conditioning (HVAC) units, building maintenance, etc., that otherwise a landlord would have taken care of for you.
I recall negotiating a lease renewal for five co-tenants who were sharing a fairly large office in a small strip plaza. In fact, the office occupied about half of the entire plaza. Even though the landlord did not want to sell this property, I negotiated a First Right to Purchase Option for my clients. With going one step further, I also negotiated the purchase price at the then current market value - even though their purchase option would not likely be used for about five years. Also, I put the deal together so that each co-tenant was on the lease independently. As of today that building has doubled in value; however, the tenants can purchase it for the lesser price I originally negotiated for. It will be a nice profit on paper.
I have been coaching and negotiating for business-owners and franchisees since 1993. I am never reluctant to make recommendations especially on a case-by-case basis. My opinion on leasing versus purchasing is clear. Don't purchase and move your business into a property for the sake of owning real estate. Only purchase a property for your business if you would lease it anyway. In other words, don't resign to a mediocre location just so you can play landlord. If you want to buy property there are other residential investments you can explore. If your business isn't making money within a few years you will simply end up selling the property and moving to a better location for lease, probably at a loss.
If you own the property, the perfect scenario at retirement time could be to sell the business but retain ownership of the real estate. This will provide a good source of reliable income for a long, long time to come.
Dale Willerton is The Lease Coach - a senior commercial lease consultant and author of Negotiate Your Franchise Lease or Renewal. Willerton works exclusively for tenants all across the US and Canada and regularly speaks at major franchise shows and trade conventions. Visit www.TheLeaseCoach.com./ www.HelpULeaseFranchise.com.
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