Real estate realities: When should you buy or lease?

UPPER CUMBERLAND – Commercial customers all across the country are downsizing their footprint these days: retailers are testing smaller stores, businesses are making due with existing spaces, others are moving away – literally – from larger-than-necessary office buildings.

That’s something we’re seeing locally, Johnny Reeves, owner/broker at Berkshire Hathaway HomeServices/Southern Realty in Crossville, said. “A lot of businesses are trying to make do with smaller buildings, maybe making due with existing space instead of expanding into a larger one,” he said.

But for those businesses bold enough to buy or lease, which is better?

According to several area real estate professionals, it all depends. Factors like lending, flexibility, location and more should be taken into consideration.

“It all works together,” said Bill Monday, agent/broker with Commercial Consultants LLC in Cookeville, which offers business brokerage, manufacturer representation and real estate services. “It varies case-by-case, especially for small businesses.”

Loving a lease

If speaking in generalities, most business startups tend to lease, Monday said, and there’s a variety of reasons why: One, companies don’t want capital tied up in real estate, and they avoid all the related costs that come with a purchase transaction: appraisal fees, loan fees, commissions, licensing fees. Secondly, if in a lease, a business can more easily adjust its space amounts as future market conditions change.

Thirdly, given the recent financial market, it’s often easier to get into leased space without having to jump through the hoops of financing a business loan.

“Banking, financing is tough,” Monday said. “There are different ways of doing it, so there are funds available and you can get it done. But our greatest challenge right now is financing.”

All leases are unique, however, and all markets, even regionally, are, too. While more businesses in Cookeville may lease, up Interstate 40 in Crossville, there’s not a lot of individual units available for rent outside shopping centers, Reeves said. That “drives a lot of folks to look at the ownership avenue.”

“Some smaller business, new start- ups, they want to lease initially because of the capital investment involved,” Reeves said. “And, of course, a lot of those are driven into the shopping centers because of the availability.”

Benefits of buying

On the flipside, buying has its own set of benefits. There are no landlord issues; a business can control its own conditions, hours, upgrades.

“Sometimes when they’re renting, the build-out cost can be considerable, trying to suit the property to what they need, designing the interior and so forth,” Reeves said. “That encourages a lot of folks to go the purchase route as far as commercial goes.”

It’s also sometimes cheaper to purchase a property than to lease. “With proper financing, a little bit of capital and a down payment, it can be a growing investment,” Monday said. There’s also an opportunity for extra income. If a buyer purchased a multi- unit commercial property, they could rent out unneeded space, bringing in additional monthly revenue thus lowering their cost of operations, said Darren Wilson, an agent with The Realty Firm in Cookeville. He said locales along Interstate Drive, Jackson Street extension, Jefferson and Willow Avenue are among the highest rent locations in town. Lower rents – and consequently, lower foot traffic – can be found in the older parts of the city.

Then there’s the option to lease to purchase, which can be a “very attractive” option for new businesses, Monday said. It allows for flexibility for both landlords and tenants.

“Some property owners just won’t do it; they’re just in the business to lease. And that’s OK,” Monday said. “But, depending on the situation, it’s a really good thing for the buyer. It’s good for the seller also.”

Catching fire

Outlook for the commercial market is mixed. Reeves said he’s seeing a little more activity commercial wise, which is a positive sign, “but I don’t think it’s something that’s catching fire,” he said.

Monday said there’s good availability for most commercial real estate requests, existing structures, vacant land, buildings with square footage. He’s also “cautiously optimistic.”

“It’s by single digits, if you’re talking growth factor,” he said, “and it depends on what market you’re in, whether its leased space, retail, or office space. Office space, for instance, is tough.

“In our part of the country, prices were affected by the 2008 debacle, but the recovery has been good,” Monday added. “In some areas, we’re back to where we were before. Values on property are very attractive. They’re not depressed, and there is availability for almost anything you want. This marketplace is very active.”

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