Should Your Business Buy or Lease Commercial Real Estate?

Business owners evaluating commercial space often face an important decision: should the company continue leasing its location or purchase a commercial property?

There is no single answer that works for every business. Buying can provide ownership, control and the potential to build equity, while leasing can provide flexibility and require less initial capital.

The Buy vs. Lease Commercial Property Calculator above provides a preliminary financial comparison so business owners can better understand how the two strategies may differ over a selected period.

Advantages of Buying Commercial Property

Purchasing commercial real estate can provide several potential benefits for an owner-user business.

Mortgage payments can gradually reduce the loan balance, allowing the owner to build equity. The property may also increase in value over time, although appreciation is never guaranteed.

Ownership can also provide greater control over the premises. Subject to zoning, loan documents, laws and other restrictions, an owner may have more flexibility to modify the property or use it according to long-term business needs.

Potential Disadvantages of Buying

Purchasing a commercial property generally requires substantial upfront capital. The business may need funds for a down payment, closing costs, inspections, environmental review, improvements and financing expenses.

The owner also assumes responsibility for property-related costs and risks. Taxes, insurance, maintenance and capital repairs can change over time.

Ownership may also reduce flexibility if the business needs to expand, relocate or substantially change operations before the property can be sold or leased to another occupant.

Advantages of Leasing Commercial Space

Leasing often requires less initial capital than purchasing a property. This can allow a business to preserve cash for equipment, employees, inventory, marketing or other operating needs.

A lease can also provide greater flexibility. A growing company may prefer to lease while it determines its long-term space requirements.

Depending on the property and lease structure, some building responsibilities may remain with the landlord rather than the tenant.

Potential Disadvantages of Leasing

Lease payments generally do not create ownership equity in the property. The tenant may also face scheduled rent increases, changing NNN or CAM expenses and uncertainty when renewal time arrives.

Commercial leases can also contain restrictions regarding alterations, signage, assignment, subleasing and permitted use.

How the Buy vs. Lease Calculator Compares the Two Options

The calculator estimates the cumulative cash cost of leasing over the selected period and compares it with the estimated net cost of property ownership.

For the purchase scenario, the calculation considers down payment, closing costs, mortgage payments, annual ownership expenses, estimated appreciation and the remaining loan balance.

At the end of the analysis period, the calculator estimates property value, subtracts selling costs and the remaining loan balance, and calculates estimated net equity.

Why Equity Matters in a Buy vs. Lease Analysis

One of the major differences between purchasing and leasing is that a buyer may build equity as the mortgage balance declines.

If the property also appreciates, the owner’s equity may increase further. However, property values can also decline, remain flat or change differently than the assumption entered into the calculator.

Why Appreciation Should Be Used Carefully

It is tempting to assume that a commercial property will steadily increase in value, but appreciation is uncertain.

Commercial property values can be affected by interest rates, tenant demand, market rents, location, zoning, property condition, capitalization rates, economic conditions and many other factors.

For a conservative comparison, users may choose to enter a modest appreciation assumption or zero appreciation and compare multiple scenarios.

Rent Escalations Can Change the Lease Comparison

Commercial lease costs often increase during the term. A property might begin at one rental rate and increase by a fixed percentage each year.

NNN and CAM expenses may also change as property taxes, insurance and operating expenses change.

The calculator therefore allows separate assumptions for annual base-rent increases and NNN/CAM growth.

The Opportunity Cost of a Down Payment

One factor not included in this simplified calculator is the opportunity cost of the cash used for the purchase.

A business that spends several hundred thousand dollars on a down payment could potentially have used those funds elsewhere in the company or in another investment.

A more advanced financial analysis may compare the expected return on that cash with the potential benefits of owning the property.

Tax Considerations When Buying or Leasing

Commercial real estate transactions can have significant tax consequences. Ownership may involve depreciation, interest deductions, property expenses and eventual tax consequences when the property is sold.

Lease expenses can also have tax treatment relevant to the business. Because tax outcomes depend on the taxpayer and transaction, this calculator does not attempt to estimate tax consequences.

Business owners should consult qualified tax and financial professionals for advice regarding their specific circumstances.

Operational Factors Beyond the Numbers

The financially cheaper option is not automatically the best option for a business.

A property must work operationally. Important considerations can include location, zoning, parking, visibility, truck access, loading, power, ceiling height, signage, customer access, employee commuting and future expansion.

A business expecting significant growth may prefer flexibility, while a stable business with long-term location requirements may place greater value on ownership and control.

Buy vs. Lease Commercial Property Calculator FAQs