Friday, August 1, 2014

Reasons that you SHOULDN'T lease #CRE

Image Attribution: www.athensnews.com
Last week I recounted the tale of my client that phoned and asked if he should buy the building that he occupied. If you missed the post and would like to read it now, please press here. The post was one of the most widely read of all time...thanks mom and dad for reading...Anyway, the wide readership spurred today's post...reasons that you shouldn't LEASE commercial real estate. Before I jump into the anti leasing realm, let me digress. I'll catch you in two and two (thanks to Chuck Woolery).

I provide Location Advice to owners and occupants of industrial buildings in southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. My expertise is questionable...but oh well...

Back to the question of leasing.

I recently met with a client of mine. The purpose of our meeting was to discuss his upcoming lease expiration and some direction on a renewal...at least that is the way the meeting began. As we delved into the subject, it became painfully apparent to me that this client should OWN a building. So what were the "tip offs" in this client's case.

Age: The client is 42. He plans to continue his current business until his son is through college (approximately 15 years). He can retire the debt in the time until his son graduates and own the real estate free and clear.

Stabilty: The client has been in business for fifteen years and his business has grown each year.

Size requirements: The client has occupied his exiting location for five years and prior to that another five years in a previous space...all about the same size.

Wealth objectives: The client is looking for some investment diversity and believes commercial real estate should be an integral part of his plan.

Historically low interest rates: He knows that we only go up from here and if he can lock in a low rate today, he freezes his NNN occupancy costs for 20-25 years...if he decides to stay in business that long.

In short, this client should definitely OWN vs. LEASE today.

Are there other reasons that a company should NOT lease?...certainly.

Special purpose building: If the occupant has a substantial investment in processes, office space, or other immovable improvements, try to own the real estate...you don't want to be at the mercy of an owner that will extract a value for your inability to move.

Ownership structure: Closely held works best and if the ownership has few owners.  As we discussed last week, publicly traded companies typically DO LEASE as they don't want the negative effect from depreciation on earnings.

If your business is home based: My wife Carla runs her business out of our house. Our kids are grown and gone so we have ample space for the business. The additional overhead, for a location, is impossible to justify...maybe someday!

If you can outsource the need for the location: You shouldn't lease a building if you can outsource the function. Remember, there are other costs in addition to rent to consider...utilities, tenant improvements, fixturization, etc.

 
So there you have the alternate view and now you know the reasons NOT own and the reasons NOT to lease.