Lease vs buy: business premises

This is an ongoing dilemma for many businesses. When a business commences operation, it is important to concentrate on cash flow and establishing the business and it's probably wise to not outlay unnecessary capital until the business is established. Over time, the choice may be out of the owner’s hands as growth, and the need for more size (space) among many other factors, may lead to the decision being made for the owner.

The starting point, besides the considerations below, could be to seek advice from an accountant to model the costs of purchasing a premises and compare this to leasing it.

The fundamental needs of the business must first be assessed.

Considerations
Floor space: The cost per square metre can impact on the affordability of purchasing the premises, whereas it may be more cost-effective to lease the space. Licenses and permits, and allowable use need to be factored in.

Visibility: Better-placed premises in a suburb can cost more to purchase than to lease, so leasing may be better.

Signage: This is important for many service and product businesses alike. Even legal and accounting industries, which have a client base that know where they are already, can potentially benefit from this.

Parking: Very important to have this available for clients if clients are required to come to the business, rather than the business come to them. Restaurants, cafés and hotels, to name a few, list this near the top of their list. Access, with a consideration of anti-discrimination laws is important.

Location: With the internet, this is becoming less important depending on the business, of course. The suitability of the environment, and the demographic of the businesses clients can lead to the decision being made for the owner depending on affordability to be situated in an appropriate location. Proximity of suppliers, distributors and clients, as well as complimentary services offered by other businesses all play their role.

Budget: The bottom line; having the borrowing capacity, the deposit, the ability to borrow based on tax returns or income, acceptable to a lender, will ultimately determine the choices a business has.

Benefits
Owning an asset, which can grow to provide a nest egg, is the most obvious benefit. Wealth, therefore, can be increased on two fronts rather than just one. The first one being goodwill, stock and the client base, the next being a tangible, ‘growing in value’ asset. The growing equity in the property is effectively, in itself, a separate business, that of being a property investor. This can then be accessed to provide the capital for expansion, working capital and weathering any storm that may come the businesses way.

Fitting out a leased premises to operate the particular business can be easier than a residential dwelling from permission from the landlord's perspective but it does provide more freedom to own the premises. A financial planner can advise if it is considered appropriate to purchase the premises with a self-managed superfund (SMSF), or if an SMSF is even worth setting up in the first instance.

Negatives
It is arguable as to whether the loan repayments on the debt incurred by having purchased the premises puts the business owner into a more exposed position. If interest rates were to rise, it could eat into cash flow, however, rent rises by the landlord could have the same result. Often all outgoings are paid by the tenant with a commercial property, so the normal costs, typically associated with owning a residential property, can be lumped onto the tenant anyway with commercial property, so buying a premises does not necessarily adversely affect the business.

There are of course tax consequences which need to be considered, even when running a business from home. If a person claims part of their home loan as a business expense, it could undermine the capital gains tax exemption on part of the house.

In conclusion, it depends on a number of factors as to whether a business, can, should, or must buy the premises. There is always the underlying benefit of owning an asset, this can benefit everyone, but it must not be undertaken if it could be to the detriment of the solvency and growth of the business. Whether it is a lease or purchase contract that is signed, it is always wise to seek legal advice. Whether buying in an SMSF or not does require financial advice, and to determine if the business is able to purchase and maintain a business may well require accounting advice, but bear in mind that even with the advice to buy or lease, it is the business owner that must determine if all the considerations above are congruent with the decision. These considerations can be more important than the advice.