Buy or Lease Commercial Property for Small Business? 4 Factors to Consider
Deciding whether to buy or lease commercial property for your small business in Canada? Here’s what you need to know.
If you have a small business, deciding whether to buy or lease a commercial property is a critical undertaking. Both options have clear advantages, and both options have clear disadvantages. While finances are of paramount importance when deciding, which option is best for your particular situation, there are also a number of other factors that you will need to consider.
Where Size Matters
One of these key factors is space. When picking a location for your clinic, you need to be very mindful of the fact that, as in most things in life, size matters when choosing a home for your practice.
How much space does your clinic need to operate comfortably? More importantly, how much space will you need five years from now? How about ten years from now?
If you are leasing a property, your main concern is not just the amount of square footage you need now, but how much you anticipating needed during the life-time of the lease. If that space proves insufficient for your needs, you can simply move to a new location at the end of the lease, or, if necessary, break the lease and move to a location that is a better fit for your practice.
Looking to the Future
However, if you are purchasing a commercial property, you need to look much further into the future of your practice. While residential property loans generally run from 15 to 30 years, commercial loans commonly run for seven to 20 years, meaning your property should either meet your space and infrastructure requires for that period or at least be capable of being expanded if needed to better accommodate your needs during that term.
Barring that, your options would be to make do with the space available, or move to a larger facility, which can be a very costly proposition if you are still making payments on your current location.
However, at the same time, you need to be careful that you do not buy or lease more space than you need. Wasted space represents wasted resources – why heat, cool, illuminate or insure more space than you need? – and wasted money.
A growing trend in the Greater Toronto Area (GTA) in recent years, builders and developers have been buying up smaller property lots in the GTA and promoting work/live investments. This is an ideal investment for someone looking for a location in the City versus setting up their practise in the urban sprawl subdivisions.
Finally, what is the best option for a practice that is not ready to purchase now, but would like to have that option in the near future? For those practices, a lease-to-purchase property can provide a relatively painless, best-of-both-worlds proposition.
Lease-to-purchase options usually apply to commercial properties owned by single owners who may consider taking lease payments counted towards purchase of the property if the tenant decides they would like to purchase the property. This arrangement is not usually offered by Builders/Developer conglomerates.
Depending on the particular terms of the lease, the tenant generally has the right at the end of the lease to either renew the lease and continue with lease-to-purchase payments, finance the balance of the purchase price and buy the property, or simply walk away from the lease.
Purchase Condition to Consider
Is the ‘first right of refusal’ to purchase the property. Under the first right of refusal, the property owner is simply agreeing to give the you the tenant, first rights to purchase the property – at an agreed price – if at any point during the lease the property owner decides to sell the property. Under this arrangement, prior lease payments are generally not counted towards the purchase price, but the leasor does have the right to purchase the property rather than have it sold to a new owner or landlord.
NOTE: First and foremost, you should consult a professional financial advisor/planner who is familiar with your business when considering commercial property purchase or leasing.