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Commercial |
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 Commercial Property: Lease or Buy?
When your business requires its own premises a decision must be made as to whether to lease or purchase commercial property. If the answer is not immediately obvious to you, here are some of the considerations:
Starting point - cash flow
Your calculations will be based on interest rates and rates of return on property. Interest rates vary according to the economic cycle and other factors. Rates of return on investment in property vary according to the interest rate cycle, and also to the type of property. An investor in a substantial shop property in the south of England might expect a return of 5%, whereas an investor in industrial property in the north of England may seek a return of 10% or even 12%. This difference reflects the market’s perception of risk.
On a pure comparative cost calculation, you should therefore set out the figures comparing the total cost of being your own landlord, as against the total cost of someone else being your landlord. If you are looking at a rent of, say, £10,000 per year against a purchase at £100,000, then you need to be able to borrow at less than 10% for the cash flow effect of your purchase to be better than the cash flow effect of a lease. (Ignoring capital repayments).
Capital appreciation
 In the long term the capital value of your purchased property will increase at least in line with inflation. This however is dependant on many factors. Over the last ten years the changing structure of the workforce has reduced the demand for industrial and older office space. Your motor repair workshop is probably worth the same number of pounds today as it was worth ten years ago. In real terms you have probably lost half it’s value. Even if you use a professional surveyor to advise on today’s values, you will still need to take a view on future values.
In a lease the risk is taken by your landlord. The rent is likely to be fixed for a number of years, and will then be increased in line with the general level of rents for a property like yours.
Property is a solid asset
In the cash flow calculation above, no account has been taken of repayments on any borrowing you took out to fund the purchase. If a large proportion of the purchase price was borrowed from a specialist property lender, with repayments of capital and interest (like your house mortgage), then you may still be able to find a deal which provides a total payment to your finance provider no greater than the sum that you would have been paying in rent. In that scenario, you end up owning your property. That is obviously more attractive than a lease situation. But if you need to sell your property in bad times, you may not achieve the price you thought it was worth.
Flexibility
 At the end of a lease you can walk away with no further obligation. If you have to move whilst a lease is still running, you have more problems. You will have to continue to pay the rent - or find someone else to take over the lease from you. If the “someone else” you find fails to keep up payments, then you might find your old landlord knocking on your door instead. Finding a new tenant may be inconvenient. You may find there is a deficiency between the rent you were paying, and the new rent someone will pay to take you out.
The bottom line
Consider very carefully. Keep your lease as short as you can, or buy a property you are sure will increase in value. Note that this is an area where you must take legal advice on the lease presented by your proposed landlord.
Net Lawman document templates:
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