Should you continue leasing or buy a building?
Entrepreneur magazine, January 1998
Your lease is up for renewal. Should you sign a new one, or is it time to buy your own building? Kale Gaston, southeast regional vice president of GE Capital Small Business Finance in St. Louis, offers these tips for making this important decision:
- Consider the long-term impact on your business. This calculation is easier for some businesses than others, says Gaston. For example, if you're a manufacturer or distributor, it's fairly simple to project future growth based on your past performance. The process will take more thought and research for retail or service companies. Points to consider include tax issues, your plans for future expansion, how you manage fluctuating business cycles and your plans for customizing the space.
- If you're going to buy, decide between purchasing an existing facility and building a new one. In a tight real estate market where available inventory is limited, the costs may be about equal. Certainly you'll save time by moving into an existing space, and the initial cost outlays will likely be lower. On the other hand, constructing a custom facility can enhance your long-term productivity and efficiency, especially if your business has unique needs such as loading docks, refrigeration, lab space and so on.
- Stash some space away. If you buy, be sure the facility can accommodate your needs today and into the future. You may want to "warehouse" some space for future expansion by buying more than you need now and subletting the excess space until you're ready to expand, Gaston says.
- Talk to several lenders. Consult with your banker and several other commercial lenders who are experienced with financing real estate purchases for small businesses. Gaston says this is the most important part of the decision-making process. "You need a lender who understands what you do, can provide you with a loan product that meets your needs and can grow with you as [your business grows]," he says. A good lender will sit down with you in the early stages of the process and help you with financial analysis and forecasts, then work with you to put the package together and secure the best possible loan terms. Real estate brokers are usually able to refer you to appropriate lenders; you can also check with your accountant and attorney.
Gaston says a small business typically begins to consider buying real estate when it is about 5 years old. "In the start-up stage, [businesses] need to be putting their equity contribution and loan money into growing the business," he says. "After they've leased for a while, and they're growing and need more space, they'll buy a piece of real estate and build an investment for the future rather than [paying increased] rent."
Jacquelyn Lynn is a business writer in Winter Park, Florida.