For many companies, there comes a time when owners must decide whether to renew a lease, move on to a different one, or buy new (or pre-existing) space. In some cases, it is a relatively easy decision. Maybe you are happy where you are and feel like such a part of the local community that moving is not an option.
In other cases, a move can be an important step forward. For example, if a business is looking to cut costs, reducing office space and signing a less expensive lease can generally help the bottom line. Conversely, a growing company might decide to buy property and build new to increase its prestige and visibility. Making the right choice is critical.
Buying office space is clearly a major undertaking, but owning your own building can give you flexibility and tax advantages a lease cannot offer. For instance, you can:
- Control how to configure & use the property
- Sublet some of the space if you so choose
- Decorate, landscape, & maintain it as you wish
You also will benefit from mortgage interest and depreciation deductions at tax time.
Naturally, there are risks to ownership. For one, you will not be able to easily pick up and move on. And if you are structured as a flow-through entity, you will need to decide how the owners will share the cost of buying and maintaining the building. Keep in mind that the building need not be owned in the same proportion as the business itself.
There are other matters to consider as well. You will have to delegate responsibility for arranging and overseeing activities such as exterior maintenance, cleaning, and paying taxes and insurance. Plus, if you decide to sublet some of your space, you will need to wear one more hat — that of a landlord.
Lessees look out
Of course, as you may well know from doing it for many years, leasing business space has its downsides, too. Perhaps you have dealt with a particularly unresponsive landlord or property management company. You also may have less freedom to change or rearrange space — not to mention ever-increasing rent and the loss of mortgage interest and depreciation tax deductions. If you decide to move, though, it is easier to leave a rented office than to sell one you own.
Ultimately, it is a question of net present values. Will the present value of the capital appreciation you ultimately gain when the property is sold be greater than the current cash flow advantage you would likely have under a lease?
Consider your options
These are just a few of the issues to study as you consider your company’s location and office space heading into a new year. Remember, there may be tax issues not mentioned here or other factors affecting the right decision. Contact us for a full assessment of your options.