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To buy or to lease?

Here at Citizens Bank, our experienced commercial lenders know that’s one of the biggest decisions that small and midsized businesses face.

As businesses continue to grow through expansion and diversification, so does their need for more space. Whether it’s office space, retail space, warehouse space, or some combination thereof, there are many options to consider. While you’ll often hear that the three most important factors in real estate are “location, location, location,” understanding the advantages and risks of leasing and buying commercial property can be equally important. As with most things in business, there’s no one-size-fits-all answer – it all depends on your firm’s particular capacities and goals.

Not sure where to start? Here are some pros and cons to ponder:

Buying a Commercial Property

Owning real estate comes with many benefits in both the short and the long term, but nothing comes without a cost.

Pros Cons
  • You can build equity, which can be the basis for low-interest loans in the future.
  • It can be a good long-range investment if the property value appreciates.
  • It reduces your exposure to fluctuations in the rental market.
  • Your monthly payments are typically more predicable due to limitations in payment adjustments based on the terms of the loan.
  • You may be able to take tax deductions for interest and annual depreciation.
  • You can more easily tailor the property to suit your specific needs.
  • You can lease extra space to create a secondary income stream and control building uses.
  • Your initial out-of-pocket expenses may be higher, including down payments and closing costs.
  • You may have less liquidity available for other needed expenses.
  • You will be responsible for maintenance, which takes both money and time.
  • You have added regulatory and legal responsibilities, including liability insurance.
  • In the event that your property value declines, you may take a capital loss.
  • You may not need as much space as many commercial buildings offer.
  • You have to consider zoning restrictions if you want to expand.
Leasing a Commercial Property

Leasing can be a more affordable and flexible option, especially for newer enterprises, but it has its drawbacks.

Pros Cons
  • It may be easier for you to qualify for a lease than a mortgage.
  • You may be able to afford to occupy a prime area that would be too expensive to buy in.
  • You can maintain capital and keep lines of credit open.
  • You may be able to fully deduct lease payments as a business expense.
  • You may have greater freedom to grow and contract according to your business cycle.
  • At the end of your lease, you can reassess your options and decide whether to relocate.
  • You generally won’t have to pay for maintenance.
  • You have less control over cost and availability.
  • Leases can be expensive to renew, and you can’t always predict the amount of increase.
  • You might be forced to relocate at the end of your lease term.
  • You will likely have to pay a security deposit plus upfront attorney and brokerage fees.
  • If you go out of business, you will have to keep paying rent or find a subletter.
  • Depending on the terms of your lease, you may not be free to sublease extra space.
  • If you make durable improvements to the space, your landlord keeps the benefits.
Moving Forward

Before you decide to buy or lease, you may want to consult an attorney or tax professional who can help you evaluate how these and other factors apply to your particular situation. And when it comes to borrowing and banking, you need a trusted partner who understands the unique needs of local businesses. Citizens Bank has been providing financial services in East Tennessee for over 85 years. We’ve been recognized as a Top Commercial Lender by the Independent Community Bankers of America.

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