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How To Decide Whether To Build Or Rent
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The How-To Business Book
11/20/2000
By: Susan E. Cornell
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You trip on your trip down the hall. Your files are filed to the ceiling. Clearly, the company needs additional space to accommodate its growth. You are faced with an important decision: Build a new facility, or rent?
Pondering the “Should we rent?” question, consider the following, which may lead you to decide that renting the new facility is the wise move - not.
• You need to retain mobility. Perhaps the company's space needs will change again in future years or perhaps the company will need to relocate completely because of a changing target market.
• Your current cash flow is significant. If your company is young, renting may be better from a cash flow perspective since up-front outlays for a building can be high. The renting option, however, will most likely require only a security deposit and one month's rent at a time.
• You question whether the facility is in an area of declining property values. The site might be right for today, but if the area's real-estate values are dropping or stagnant, this becomes your landlord's problem and not yours.
• You don't want to be responsible for maintenance. Consider all of the details in upkeep that may keep you from devoting time to running the business: snow removal, cleaning, roof repairs, electric and plumbing repairs, and so on. The property owner may be responsible for these.
• Great properties for purchase just don't seem to be out there. Perhaps the right location isn't available to be built upon at the moment or is offered only as a rental.
• Credit problems prevent you from obtaining the mortgage. If your company has had past financial difficulties or is relatively new, a lender may not approve the mortgage, whereas a landlord may rent to a company in either situation.
• Renting may offer tax advantages. Rent payments are tax-deductible business expenses. Compared to a purchase, a lease could cut your tax bill. Factors at play include profitability of the business, age of the business and the portion of the rent or purchase price which relates to land.
When pondering the “Shall we build?” decision, look at the following (again, not all of which may be relevant to you):
• Staying where you are has major advantages. If you know that a particular location will be or is already a winner, owning and building on the property makes sense as there will never be a question that the property owner will change its use or raise the rent.
• The long-term cost is appealing. Over the long haul, owning property is usually less expensive because, via renting, the landlord is building in his own profit premium over time.
• Property values in the area are appreciating. If the company is in an area where values are appreciating, it's better to own the property so as to profit from the gains if you eventually sell.
• Control of the property is an issue. Perhaps the hours or the way you do business will change. If you rent, will such details need approval? Or, perhaps you plan to renovate or make additions down the line. If you build and own the property you only need zoning approval, not your landlord's.
• There are no suitable rentals. Renting may simply not be an option for your needs.
• Building and owning may bring tax savings. Part of the outlay to purchase a site may be recovered by depreciation deductions. Interest-paid deductions may also be available if the purchase was financed. A purchased property rather than a rented one may reduce your tax bill. Again, the factors to consider are profitability of the business, length of time the business has been in existence, and the portion of the rent or purchase price which relates to land.
The right contractor is capable of doing a tenant fit-out for building your new facility. A fit-out involves taking an existing structure and altering it to suit another purpose. Fit-out usually includes the following: wire management access floors, floor and wall finishes, tenant-specific cabling and HVAC, ceilings, interior partitions and doors and lighting.
More and more businesses are considering existing structures rather than new construction. Some reasons for opting for a fit-out rather than an “out-of-ground” new building include reducing the amount of time to complete the building project as well as the fact that desirable sites are often in established commercial areas.
A tenant fit-out is a challenging undertaking and, as such, requires a contractor capable of undertaking the project cleanly, safely, quietly and expertly. The right contractor will understand your specific needs and can lay out schedules and plans with ingenuity and advice. Further, the experienced contractor will be sensitive to adjacent tenants and the needs of the structure.
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