Lease vs Own - Part 1: Ownership Advantages and Disadvantages
As with any business decision, there are certain advantages and disadvantages of leasing as well as owning commercial real estate. The right solution depends on each individual property's location and features as well as the user's personal financial and tax situation. Let's first discuss ownership.
From the user's perspective, ownership means to obtain the full economic and physical use of a property. Their are several advantages of this approach not the least of which is that it gives the user complete control to operate the building as they see fit. Being able to change the appearance of a property and take advantage of the prestige of its location can be important to many users. The financial benefits of owning include tax savings, potential appreciation and additional rental income. Tax savings come from cost-recovery rules and and mortgage interest paid during the holding period and when the property is sold. As the owner of the property the user is entitled to any appreciation in the value of the property during the time period that the propery is held. Lastly, if a portion of the property is rented, income from the other users can be used to pay a portion of the mortage on the property, fund the owner's prinicpal business or be used for any other use as the owner see fit.
There are disadvantages to ownership and these should be weighed before making a decision to purchase rather than lease. The initial cash down payment to acquire the property is cash that could otherwise be used to fund the user's principal business or for other investment opportunities that are available at the time of purchase. Financing for commercial real estate purchases require strong financial statements on the company and may sometimes require personal guarantees from the principals of the company. Often times, the addition of long-term debt on the balance sheet can make it difficult for some companies to even qualify for a mortage under the lender's debt ratio restrictions. As the owner of the property, the user bears substantial risk in the form of property damage, functional obsolescense, illiquidity, safety of the building's occupants and visitors, and changes in codes or zoning ordinances that may be unforeseen.
I'll discuss the advantages and disadvantages of leasing commercial real estate in Part 2 which will soon follow.
From the user's perspective, ownership means to obtain the full economic and physical use of a property. Their are several advantages of this approach not the least of which is that it gives the user complete control to operate the building as they see fit. Being able to change the appearance of a property and take advantage of the prestige of its location can be important to many users. The financial benefits of owning include tax savings, potential appreciation and additional rental income. Tax savings come from cost-recovery rules and and mortgage interest paid during the holding period and when the property is sold. As the owner of the property the user is entitled to any appreciation in the value of the property during the time period that the propery is held. Lastly, if a portion of the property is rented, income from the other users can be used to pay a portion of the mortage on the property, fund the owner's prinicpal business or be used for any other use as the owner see fit.
There are disadvantages to ownership and these should be weighed before making a decision to purchase rather than lease. The initial cash down payment to acquire the property is cash that could otherwise be used to fund the user's principal business or for other investment opportunities that are available at the time of purchase. Financing for commercial real estate purchases require strong financial statements on the company and may sometimes require personal guarantees from the principals of the company. Often times, the addition of long-term debt on the balance sheet can make it difficult for some companies to even qualify for a mortage under the lender's debt ratio restrictions. As the owner of the property, the user bears substantial risk in the form of property damage, functional obsolescense, illiquidity, safety of the building's occupants and visitors, and changes in codes or zoning ordinances that may be unforeseen.
I'll discuss the advantages and disadvantages of leasing commercial real estate in Part 2 which will soon follow.
posted by CFCB at
10:13 AM
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