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Commercial property: Should you own or lease?
Allen Buchanan | The Orange County Register


Commercial real-estate brokers are marketing images like this one, of Tribeca. PHOTO: LEONARD STEINBERG

Commercial real estate comes in many varieties.


There are warehouses and manufacturing buildings, commonly known as industrial buildings. There are office buildings, which can be two-story walk-ups, high-rises, mid-rises or – if you add a bit of warehouse or manufacturing capacity – flex spaces.


Retail spaces are located in neighborhood shopping centers, malls, power centers or strips.


Institutional campuses such as colleges, hospitals and government buildings are also classified as commercial real estate. And don’t overlook hotels, resorts, and motels.


Whatever type of commercial property you occupy, a crucial question is whether to own or lease it.


Some classes of commercial real estate lend themselves more toward leasing. Few if any regional mall occupants own their space, for example, because the spaces are difficult to divide into smaller ownership interests.


In order to own commercial real estate, the property must have a separate, definable, transferable parcel. Here’s an easy rule: If the space has its own tax bill, it can generally be owned by the occupant.


So how do you determine whether to own or lease your commercial space? The general rules cross all classes of commercial property. Your specific situation may vary, so it is always a good idea to consult professionals before choosing an occupancy type.


In my experience, owners of commercial real estate generally have one or more of these characteristics in common:

• They are closely held entities. Sometimes known as “mom and pop” companies, they can be a small C corporation, S corporation or LLC, which can benefit from the depreciation on the real property. In these cases, the owner of a business that occupies a building frequently owns the building too. For such companies, the decision to own or lease is the difference between paying rent to a third party or paying it to yourself. Assuming the other factors below align, ownership can be awesome.


• Their space needs are stable. If your space requirements fluctuate over time, it’s more difficult to disengage from real estate you own. If you rent a space that you outgrow, you can sublet it or wait for your lease to expire and walk away. If you own the building and owe monthly mortgage payments, you are forced to sell or find a tenant who can pay you rent.


• They have very specific facility needs. Companies that make large investments in their commercial property – heavy power distribution, dense office buildout, food processing equipment, big freezers or coolers, for example – will opt to own rather than lease. To relocate these capital-intensive improvements is extremely costly!


On the other hand, occupants who lease their commercial real estate might be:

• Publicly traded companies. Ownership and depreciation of commercial real estate lowers earnings, so many companies whose stock is publicly listed would prefer to lease their locations.


• Companies with widely fluctuating space needs. As discussed above, moving is expensive, disruptive and rarely achieves a speedy payback. If you couple those factors with an obligation to service a mortgage on a building you've outgrown, you may only hamper the expansion of a fast-growing company.


• Businesses requiring a type of space that is in abundant supply. Logistics providers (warehousers and distributors, for example) have a wide choice of buildings that suit their needs. Space is plentiful and interchangeable. This tends to drive down rents, making it financially advantageous to lease the space.