Posted by Peggy Gallagher on November 9, 2018
Your business has to operate out of somewhere, and when it’s time to look for dedicated commercial space for your company, you’ll have a lot of decisions to make. And one of these decisions is whether to lease or purchase your office space.
Both options come with their own set of advantages and disadvantages, so you’d be well advised to do your due diligence and conduct a little research before deciding which option works best for your company.
So, the question remains: is it better to lease or purchase office space in Philadelphia?
Understanding the Pros and Cons of Leasing Commercial Office Space
Commercial real estate investors might assume that purchasing office space is the better way to go, but leasing office space comes with its own set of pros and cons, including the following.
Pros of Leasing Office Space
No down payment required.
As with any other types of real estate purchases, a down payment is required. However, a lease doesn’t require such a large capital investment up front. Rather, a security deposit will be required, which is typically substantially less than a conventional 20 – 25% down payment, maybe 10% with SBA loans. In Philadelphia, you frequently see landlords requesting a security deposit equal to about one or two months’ rent. Or, it could be more and varies with credit worthiness of tenant and landlord’s investment in tenant improvements for tenant.
That means you’d have a lot more capital for your business, that would otherwise have been tied up in a down payment.
No maintenance or repair obligations.
Every building will require its own fair share of maintenance and repairs over time. It’s inevitable. But where these responsibilities lie depends on whether you’re leasing and your type of lease, or paying a mortgage.
If you’re the rightful owner, the obligation to maintain and repair the structure lies 100% on your shoulders. That means you’ll not only have to cover the financial cost of these repairs and maintenance costs, but you’ll also have to manage such efforts.
If you’re leasing, however, these obligations often lie with the landlord, not you. This can free up a lot of effort that you can otherwise dedicate to your business.
Flexibility to expand/or contract.
If your company reaches a point where it’s time for expansion, a lease can provide you with the flexibility to grow, as opposed to being restricted by the size building that you’ve purchased. Among all the factors to consider when it comes to deciding between leasing and purchasing office space in Philadelphia, one of the more important ones is flexibility to expand.
A growing business will find that a lease can provide them with a much better way to accommodate expansion as opposed to buying. With the right commercial real estate agent in your corner when you negotiate the lease terms you may be able to obtain options to renew, an early termination clause or an option in the lease that can provide you with the “right of first refusal” to acquire space that might become available in the office building.
Purchasing office space, on the other hand, can limit your size flexibility.
Cons of Leasing Office Space
While leasing comes with a certain set of advantages, there are some drawbacks to consider.
Potential increase in rent.
Most office leases have annual rent increases. And on a lease renewal it’s always possible that your landlord will increase your lease price. If the cost is out of your budget, you could find yourself uprooting your business to find a place with a lease price that fits in better with your budget and profit margin.
Improvements made will stay with the building.
If you decide to make any changes or upgrades to the building to better accommodate your business operations, you can’t take them with you when you go. The only person to benefit from the time, effort, and money spent on making such improvements when you leave may benefit your landlord.
Understanding the Pros and Cons of Purchasing Commercial Office Space
Now that you’re familiar with why leasing office space in Philadelphia has its pros and cons, consider those of purchasing office space.
Pros of Purchasing Office Space
Build equity.
One of the biggest perks of buying property is the opportunity to build equity – and subsequently wealth – over time. Every mortgage payment made goes towards building equity. And over time , if you maintain, and keep your property up to date , you may see the value appreciation as well.
Payments less likely to fluctuate.
Unlike rent, which can change every time it’s time to renew your lease, you can be more comfortable knowing that your mortgage payments will stay the same – assuming you’ve chosen a fixed-rate mortgage.
Opportunity to make extra income.
If you own your property, and it has extra space for the growth of your company you have the freedom to lease out a portion of it to generate extra income. Versus sub-leasing your excess leased office space which is more complicated. In the lease the Landlord may control the rate for the sublease and who you can lease to. And, who would spend the money on Tenant Improvements? In a sub lease most likely you and you can not leverage the Asset.
Make improvements to add value.
If you choose to improve your property, you can maintain and sometimes add value to it as you build equity.
Take advantage of tax benefits.
When it comes time to file your taxes, you’ll have the opportunity to deduct certain things such as property taxes, improvements, mortgage interest, and so forth.
Cons of Purchasing Office Space
Upfront cost is higher.
Buying comes with much more significant upfront capital invested costs compared to leasing. And typically you should purchase a building that is larger than your business require to accommodate future growth. This is precisely why many businesses choose to lease. In addition to the actual mortgage payments and down payment, there are several other closing costs and Due Diligence costs associated with buying property that you wouldn’t be faced with had you chosen to lease instead.
You’re responsible for maintenance and repairs.
This can just be added to the list of costs associated with owning property. When you’re the owner, the onus to maintain and repair the property is 100% on you.
At PG Commercial Real Estate, we strive to ensure that our clients know as much as they can about both sides of the coin in order to ensure that they make a sound decision that’s best for their business. Whether you decide to lease, or purchase your office space in Philadelphia, we’ll be with you every step of the way in order to ensure you enter into a solid agreement.
