By Jack Riazzi
Owning vs Leasing? Buying vs Selling?
As in most things, it depends, so let’s dig in.
I can’t tell you how many times I have been talking with clients who have shared with me some version of the following lament: “I wish I had bought my building ages ago. I could’ve paid for it several times over with all the rent that I’ve paid to my landlord through the years. I should’ve taken the shot when I had the chance.”
Yep, I get it. Except, hindsight is always 20/20. Looking back at the last 30 years, during which time building values have maintained a steady climb up and to the right (with a few downturn shocks mixed in), it makes it look like it should have been an easy decision. Except it never is an easy decision, especially when looking forward into an uncertain future. So how does our corporate real estate team at Hughes Marino help our clients to answer the question, “Is now a good time to buy (or sell) my industrial building?” We follow a disciplined process, we ask the right questions and we let the data help drive our client’s decision making. Let’s break it down.
“…Based on the properties that are available at the time of our search, we will run lease versus purchase modeling to show you your effective after-tax occupancy cost on a comparative basis over the next ten years.”
At Hughes Marino, we exclusively represent business owners looking to buy or lease buildings for their business operations. As a result, we are able to help our clients assess the lease versus purchase decision in an objective manner. Here is an overview of our process.
First, let’s talk about your business.
Before we talk about real estate for your business, we are going to want to understand the operating fundamentals of your business. How long have you been in business? How has the business grown over the last 10 years, and how has that growth impacted the use of your real estate? What does your growth look like over the next 10 years? What is your ‘visible time horizon,’—i.e., how far into the future can you reasonably predict your business growth before things start to get fuzzy? Purchasing real estate for your business is a long-term capital commitment. You might think of it like signing a 10- or 15-year lease. By taking a long-term view, we can alleviate much of the market-cycle risk that could impact your real estate investment. What’s more, buying and selling real estate can involve friction and transaction costs. You don’t want to trade in or trade up your real estate every three years. The stability of your business, the anticipated growth and your visible time horizon are all factors that can help determine whether buying or leasing is the better path for your business today. It is also important to consider whether your facility operation requires expensive and/or specialized interior improvements, which can tilt the decision in the direction of owning versus leasing.
Next, let’s talk about the capital required for a building purchase.
Once we have clarity about your business and its needs, as well as your operational forecast and visible time horizon, another important factor in the decision to own or lease is the money—as in the down payment or equity contribution that a purchase would require compared to the relative low cash outlay that many leases require. Traditional commercial loans may require 20% – 30% down payments, which can add up quickly. A Small Business Association (SBA) loan can be a great solution for 90% financing if you qualify and understand that they take a little longer and cost a little more in terms of fees. We can help navigate this conversation with your bank and introduce you to a few SBA lenders. Don’t forget—when you are buying a building, there is no tenant improvement allowance coming from the landlord, so all those expensive building improvements are going to be part of your acquisition cost. Our Hughes Marino project and construction management team can help you to develop a preliminary improvement budget and a construction timeline so you can make these decisions with eyes wide open.
Finally, let’s talk about what’s available in the market.
After discussing your business fundamentals and the capital requirements a purchase would entail, now the fun begins—surveying the market. We start by running a detailed survey of what is currently available both for lease and for sale. Based on the properties that are available at the time of our search, we will run lease versus purchase modeling to show you your effective after-tax occupancy cost on a comparative basis over the next 10 years. This is how we help you make better real estate decisions, based on real data and a robust and rational process. You might lean towards buying, and you might even be willing to pay a slight premium in order to participate in the expectation of future real estate value gains. We will help you to see this clearly so that you can make an informed decision.
Is now the right time to buy your industrial building? And, if you own your building today, is now a good time to consider a sale-leaseback to take some of your built-up equity off the table? This much I know—it’s always a great time to have this conversation and understand your options. It just might be worth taking a shot. In the timeless words of Wayne ‘The Great One’ Gretzky, “you miss one hundred percent of the shots you don’t take.”
Jack Riazzi is a vice president at Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Jack at 1-844-662-6635 or email@example.com to learn more.