Aerial view of Scottsdale, Arizona

Pros & Cons of Leasing Commercial Real Estate

One of the more commonly asked questions we hear is “should I lease or should I buy?”

 

There are many factors when it comes to making the lease vs. buy commercial real estate decision. Below is a brief outline of several pros and cons when it comes to leasing and buying. 

The top five reasons to lease:

1.     More Options

2.     Lower Upfront Costs

3.     Less Responsibility

4.     Fixed Monthly Expenses

5.     Flexibility

More Options

As you can imagine, there are typically more available spaces to lease than available options for sale. This gives business owners/possible tenants the ability to be more specific on size, location, and price to ensure they can find the best space for the best deal that fits their needs.

Lower Upfront Cost

Although many costs are similar whether you are leasing or buying (such as the cost to move and the cost of furniture), the upfront costs of leasing are usually much lower than the upfront costs of purchasing a building. When leasing, the tenant is typically only required to pay a deposit and the first month’s rent to ensure they have the space. 

Less Responsibility

A tenant typically has a lower level of responsibility in comparison to the building owner. This does fluctuate depending on the type of lease signed, however in most cases the building upkeep and maintenance are duties of the landlord and not the tenants.

Fixed Monthly Expenses

Leasing provides a better idea of overall monthly costs for the tenant. Where the landlord/building owner will have other costs that come up throughout the year that could be unexpected, such as getting a roof replaced.

Flexibility

When a tenant’s lease is up it is typically their choice to renew or find a new space. They have the choice to relocate based on their changing business and/or needs and this makes it much easier to leave and find something new.

The top four reasons not to lease:

1.     Rent Prices Can Fluctuate

2.     No Control Over Maintenance

3.     No Control Over Neighboring Tenants

4.     May Not Fit Your Changing Company

Rent Prices Can Fluctuate

When a lease expires the tenants are subject to and adjustment the current market rates, which could be much higher. Thus, as a tenant it is important to get an option to renew and negotiate a locked in rate. This will ensure that if market rents are higher at the end of a lease, the tenant is able to remain at the rate that was negotiated in the option If market rents are lower, as a tenant, you can and should work with the landlord to honor the current market rents.

No Control Over Maintenance

As a tenant in a building, you have little to no control how the building is maintained. It is important as a tenant to walk the property to ensure the level of regular maintenance being done and to speak to other building tenants even possibly for their insight. The landlord holds the power when it comes to building maintenance and you can see how this could possibly become an issues 

No Control Over Neighboring Tenants

It may be important to research who the other current tenants in a building are and even talk to the landlord about any concerns about current or future competing businesses. This, of course, will affect some businesses much more than others for example, if you are a salon owner looking to lease, you may not want to go into a strip center with another salon already there, as it would be direct competition for customers.

May Not Fit Your Changing Company

Businesses may change throughout the course of a lease term. The company may grow or shrink. It is important to discuss options with your landlord to prepare for future events. For example, if your business is growing rapidly, it would be important to ask for the first rights of refusal on an adjacent suite to expand into. Similarly, if you find your company does not need the amount of space you originally had thought, it is important to know any sublease clauses in place or that can be put in the lease.

Considering Leasing a Commercial Space?

Whichever route you decide is best for your company, it is important to work with a professional Real Estate agent who specializes in Commercial to ensure you are getting all your questions answered and are finding the space that best fits your needs. It is also wise that you have your contract reviewed by an attorney who specializes in real estate. An experienced Real Estate Attorney can help you navigate any clauses currently in your contract or that you should add.

If you’re interested in leasing commercial real estate, make sure to get in touch with one of our team members who will help to facilitate a seamless process, from start to finish. Assessing your own financial status and your business plan can guide you as you consider whether to lease or purchase commercial space. It’s beneficial to remember that what’s best for other businesses may not necessarily be what’s best for yours.

Share this Post:

Date Posted: July 20, 2022

Interested in Receiving Commercial Real Estate Updates? Sign Up Below.

Leave a Comment

Your email address will not be published.