We have been approached by many clients who contemplate the advantages of buying versus leasing space to serve as their headquarters facility. More often than not, the underlying decision is based on the numbers. In order to make a well informed business decision, we recommend a comprehensive side-by-side comparison of each option.
WHAT FACTORS TO CONSIDER
Some important factors to consider include interest rates, flexibility to expand or downsize, building equity for future cash reserves and control in operation and management.
Current market rates are extremely favorable for organizations seeking to purchase space that will serve as their headquarters facility. For example, nonprofit organizations are able to obtain interest rates in the 3% range which can be amortized over 25 years. These rates are typically locked in anywhere from 3 to 15 years. For-profit organizations typically obtain interest rates 1.5 to 2 percentage points higher than the nonprofit rates. These rates are still relatively competitive in the 4.5% to 5% range. By comparison, these rates tend to be more favorable to the organization than lease terms that are subject to escalation on an annual basis as well as pass-through operating expenses. A Tenant is typically subject to a 2.5% to 3% escalation on an annual basis plus pass through fees for utility, custodial, real estate taxes and other operating expenses.
Many organizations sign long term leases for ten or more years that contain severe early termination penalties or rigid assignment and subletting provisions. As a result, the organization may be unable to move to service the current and future needs of their business. Ownership allows the property owner flexibility in structuring their space to suit their current and future needs regarding expansion. For example, the organization may elect to occupy a portion of its space and lease the balance to other organizations for a limited period of time. This structure enables the organization to expand its businesses and occupy more space when the lease expires or earlier if properly negotiated within the lease terms.
Property ownership is an investment that can yield significant cash rewards in the future. In many areas in the nation, purchase prices remain relatively low and organizations can take advantage by purchasing a building or even a floor in a condominium building. Annual debt service is typically comparable to lease rates or even lower in later years. As an additional benefit, the organization is building equity in the building while paying down its debt service. The organization may elect to sell the building when the market value appreciates and realize significant cash reserves or investment capital for a newer/bigger building.
Control in Operation/Management
Tenants typically do not have rights in the control of the operations or management of a building. This can become extremely frustrating when issues arise within the building. As a property owner, all decision making authority regarding operations and management rests the organization.