One of the biggest commercial real estate decisions a business owner can make is whether to buy or lease commercial property in Maryland.

Buying can provide long-term control, potential equity and ownership of a business asset. Leasing can preserve capital, provide flexibility and allow a business to occupy property without assuming the full responsibilities of ownership.

Neither option is automatically better.

The right decision depends on the business’s finances, expected growth, location requirements, available properties, financing options, tolerance for property ownership responsibilities and long-term plans.

Buying vs. Leasing at a Glance

When Buying Commercial Property May Make Sense

Purchasing may deserve consideration when:

• The business expects to remain in the location for many years
• The business has sufficient capital for the down payment and acquisition costs
• Commercial financing is available on acceptable terms
• The property supports long-term business growth
• Location control is important
• The business is prepared for property ownership responsibilities
• The owner wants to build real estate equity
• The property may provide investment or rental opportunities

When Leasing Commercial Property May Make Sense

Leasing may deserve consideration when:

• The business wants flexibility
• Future space requirements are uncertain
• The business is growing rapidly
• Capital is needed for operations or expansion
• The preferred location has limited purchase opportunities
• The business does not want property-management responsibilities
• The business may relocate within several years
• Ownership does not fit the company’s strategic goals

1. Compare the Upfront Capital Requirement

One of the clearest differences between buying and leasing is the amount of capital required at the beginning of the transaction.

Buying May Require

• Down payment
• Loan fees
• Appraisal
• Environmental investigation
• Property inspection
• Survey
• Title costs
• Closing costs
• Insurance
• Initial repairs or improvements

Leasing May Require

• Security deposit
• First month’s rent or other initial rent obligations
• Legal review
• Business insurance
• Tenant improvements
• Furniture and equipment
• Moving costs

2. Compare Monthly Occupancy Costs

A common mistake is comparing:

Monthly Mortgage Payment vs. Monthly Base Rent

That comparison is incomplete.

An owner may also pay:

• Property taxes
• Insurance
• Maintenance
• Repairs
• Capital improvements
• Utilities
• Property management
• Other ownership expenses

A tenant may pay:

• Base rent
• CAM
• NNN expenses
• Utilities
• Insurance
• Maintenance required under the lease
• Parking
• Other additional rent

3. Understand NNN Lease Costs

A business considering leasing should understand that advertised base rent may not represent the complete occupancy cost.

Under many triple-net lease structures, the tenant may pay or reimburse its share of:

• Property taxes
• Building insurance
• Common area maintenance

4. Consider the Opportunity Cost of the Down Payment

When purchasing property, capital invested in the down payment is no longer available for other immediate business purposes.

A business should consider what else that capital could accomplish.

Potential alternatives might include:

• Hiring employees
• Purchasing equipment
• Marketing
• Opening another location
• Increasing inventory
• Technology investments
• Working capital

The appropriate comparison depends on the return the business expects from its other capital opportunities.

5. Buying Can Build Equity

One of the major potential advantages of ownership is equity.

As loan principal is paid down, the owner’s equity may increase.

Property appreciation could potentially increase equity further, although commercial property values can also decline.

6. Leasing Does Not Mean the Money Is “Wasted”

Business owners sometimes describe leasing as “throwing money away.”

That is an oversimplification.

Rent purchases the right to occupy and use property without having to commit the full capital and responsibilities required for ownership.

Leasing can provide significant economic value when flexibility or capital preservation is important to the business.

7. Ownership Provides More Property Control

A commercial owner-user generally has greater control over the property, subject to:

• Zoning
• Building codes
• Private restrictions
• Loan requirements
• Governmental regulations
• Other applicable limitations

Ownership may make it easier to plan long-term improvements without needing a landlord’s approval.

8. A Tenant’s Rights Depend on the Lease

A commercial tenant’s ability to alter or use the premises is governed heavily by the lease.

The tenant may need landlord approval for:

• Renovations
• Signage
• Structural changes
• Subleasing
• Assignment
• Expansion
• Special equipment
• Other changes

9. Consider How Long the Business Will Stay

Expected occupancy period is one of the most important factors in a buy-versus-lease decision.

Buying generally involves substantial transaction costs on both acquisition and eventual sale.

If a company expects to relocate in the near future, there may be insufficient time for the potential advantages of ownership to outweigh those costs.

A company expecting to remain in the same market for many years may view the economics differently.

10. Consider Business Growth

A rapidly growing business should be careful about buying a building that it may outgrow quickly.

Before purchasing, consider:

• Expected employee growth
• Inventory growth
• Additional equipment
• Parking demand
• Expansion potential
• Ability to add building area
• Ability to lease additional nearby space

11. Consider the Risk of Buying Too Much Space

Buying more space than the business currently needs can sometimes provide future expansion capacity.

However, excess space also has costs.

The business may be paying for:

• Unused square footage
• Property taxes
• Insurance
• Utilities
• Maintenance
• Financing

If zoning, layout and market conditions permit, an owner may potentially lease excess space to another tenant, but that creates additional landlord responsibilities.

12. Leasing Can Make Expansion Easier

A business with uncertain growth may prefer a lease strategy that provides greater flexibility.

Depending on the property and negotiation, the tenant may explore:

• Expansion rights
• Rights of first offer
• Rights of first refusal
• Shorter lease terms
• Renewal options

13. Buying Can Protect Location Stability

For some businesses, location is a critical business asset.

Examples may include:

• Medical practices
• Retail operations
• Day care facilities
• Religious organizations
• Automotive businesses
• Specialized industrial users

Ownership reduces the risk that a landlord chooses not to renew the lease, subject to the owner’s financing and other obligations.

14. Leasing Creates Renewal Risk

A tenant eventually reaches the end of its lease term.

At that point, the business may need to:

• Renew
• Renegotiate
• Relocate
• Expand
• Downsize

Future rental rates and landlord decisions can create uncertainty.

15. Financing Can Change the Buying Decision

Commercial financing can materially affect whether buying is feasible.

Consider:

• Down payment
• Interest rate
• Amortization
• Loan maturity
• Closing costs
• Prepayment provisions
• Personal guaranties
• Collateral requirements
• Debt-service coverage

16. SBA Financing May Be Relevant for Some Owner-Users

Some qualifying small businesses purchasing real estate for business use may investigate financing programs administered through the U.S. Small Business Administration.

SBA’s 504 program provides long-term, fixed-rate financing for qualifying major fixed assets, including real estate.

SBA’s 7(a) program can also permit eligible loan proceeds to be used for purposes including acquiring, refinancing or improving real estate and buildings.

Eligibility, occupancy requirements, underwriting and loan structure should be confirmed with participating lenders and SBA professionals.

17. Consider Renovation and Build-Out Costs

The cost of making a property usable can change the buy-versus-lease analysis.

A purchased property may require:

• Roof or HVAC work
• Electrical upgrades
• Plumbing
• Interior renovation
• Fire-protection improvements
• Parking improvements
• Accessibility improvements

A leased property may also require substantial tenant improvements.

The difference is that a tenant may potentially negotiate landlord contributions, such as a tenant improvement allowance.

18. Consider Property Maintenance

A commercial property owner is responsible for maintaining the asset, subject to contractual arrangements with tenants or service providers.

Potential expenses include:

• Roof repairs
• HVAC replacement
• Parking lot repairs
• Structural repairs
• Exterior maintenance
• Plumbing
• Electrical systems
• Landscaping
• Snow removal

A tenant’s maintenance obligations depend on the lease.

19. Consider Major Capital Expenditures

Ownership exposes the business to large property-level capital expenses.

For example:

• Roof replacement
• HVAC replacement
• Parking lot resurfacing
• Elevator modernization
• Major structural repairs

These expenses should be incorporated into long-term ownership analysis.

20. Property Taxes Matter

Commercial property owners generally must account for real estate taxes as an ownership expense.

Tenants may also effectively bear property-tax costs under NNN or other lease structures.

Therefore, property taxes should be considered in both ownership and lease scenarios.

21. Insurance Matters in Both Scenarios

Commercial owners need appropriate property insurance.

Commercial tenants may need business personal property, liability and other coverage required by the lease.

Under some lease structures, tenants may also reimburse the landlord for building insurance.

22. Consider Appreciation — But Don’t Depend on It

Commercial property ownership creates the possibility that the property’s market value may increase.

However, appreciation is not guaranteed.

Value can be affected by:

• Local economic conditions
• Interest rates
• Property condition
• Zoning
• Market rents
• Vacancy
• Location
• Investor demand
• Property type

23. Consider the Exit Strategy

Before buying, consider what happens when the business no longer needs the property.

Potential options could include:

• Selling the property
• Leasing it to another business
• Retaining it as an investment
• Redeveloping or repositioning the property

A highly specialized property may have fewer future buyers or tenants than a more flexible commercial building.

24. Ownership Can Create a Separate Investment Asset

Some business owners separate the operating business from ownership of the commercial real estate.

For example, the property may be owned through a separate entity and leased to the operating business.

Such structures can involve important legal, tax, financing and liability considerations and should be reviewed with appropriate professional advisors.

25. Tax Treatment Should Be Evaluated Professionally

Buying and leasing can have different tax consequences.

Potential considerations can include:

• Rent expenses
• Interest
• Depreciation
• Property taxes
• Capital improvements
• Sale of business property
• Entity ownership structure

26. Consider the Business’s Credit and Balance Sheet

Buying commercial real estate can materially affect the company’s financial position.

Commercial financing may create:

• Long-term debt
• Required equity investment
• Debt-service obligations
• Potential guaranties

Business owners should consider how the purchase affects other borrowing and capital needs.

27. Compare the Total Cost Over Time

A useful buy-versus-lease analysis compares both alternatives over a common period.

For example, over 10 years, a business might compare:

28. Don’t Ignore the Time Value of Money

A sophisticated analysis should recognize that money spent today and money spent many years from now do not necessarily have the same economic value.

That is one reason a complete financial comparison can be more useful than simply adding nominal payments over the lease or ownership period.

29. Buying vs. Leasing for Different Business Situations

30. Ask Whether the Best Property Is Available to Buy

Sometimes the theoretical buy-versus-lease decision is determined by the market.

The best location for the business may have many leasing opportunities but few suitable properties for sale.

Conversely, a business may find an attractive owner-user property that makes ownership more compelling.

The real analysis should therefore include actual available properties rather than evaluating buying and leasing only in theory.

Buy vs. Lease Example

Questions to Ask Before Buying Commercial Property

Questions to Ask Before Leasing Commercial Property

When Buying May Be the Stronger Choice

Buying may be attractive when the business:

• Is financially stable
• Plans long-term occupancy
• Can fund the required equity
• Needs substantial property control
• Finds a suitable property at reasonable economics
• Can absorb ownership responsibilities
• Values long-term equity creation

When Leasing May Be the Stronger Choice

Leasing may be attractive when the business:

• Needs flexibility
• Is uncertain about long-term space requirements
• Wants to preserve capital
• May relocate or expand relatively soon
• Cannot find appropriate properties for sale
• Does not want ownership responsibilities
• Can negotiate favorable lease economics

Commercial Buy vs. Lease Checklist

Buy vs. Lease Commercial Property FAQs

This article is provided for general informational and educational purposes only and does not constitute legal, tax, accounting, financial, lending or investment advice. Buying versus leasing commercial real estate depends on the business, property, financing, lease terms, ownership structure and other circumstances. Business owners should consult qualified attorneys, accountants, tax professionals, lenders and other appropriate advisors before making significant real estate or financial decisions.