To Purchase Or To Lease ?

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That is the question. And here’s the answer:

Alissa Adler, Principal

In today’s lending climate it is often more economical for a tenant to purchase a building than to lease it. Options such as SBA or 7a financing make it possible to obtain up to 90% in proceeds, versus conventional debt that can range in proceeds from 60-70% of total costs. When assisting a client in the decision making process there are some key factors to consider.

For a purchase to make economic sense, the client needs to have a grasp of their growth trajectory. A company that may need to shrink or expand, for instance, is not a good candidate for a purchase. On the other hand, a purchase may result in incentives that aren’t available with a lease. For example, an industrial client may be able to reduce their overall occupancy cost by purchasing a vacant building eligible for 6B.

The most important factor in a purchase versus lease decision is understanding the client’s availability of equity and their financial health. Lenders tend to avoid start-ups and companies with a questionable credit history; in those scenarios, the lease option (along with an appropriate security deposit) may be the better choice.

If a building purchase makes sense after completing the upfront assessment, the next step is performing a simple analysis for the client to narrow in on the break point of how much they can spend on a building and still realize an annual savings when compared to leasing.
 

How to Calculate the Savings and Indifference Point of Total Purchase Cost:

In the below scenario, the client is deciding whether to lease or purchase a 24,000 square foot building. Assuming a 10 year lease term, the average annual cost to lease is $178,923.00 or $7.46 psf Gross. An annual cost to own below that amount would thereby constitute a savings.

Solving for the Indifference Point – the point where the annual cost to own equals the annual cost to lease – helps frame the client’s expectations of how much they might spend, should they decide to purchase.

 

2015.05.20 Purchase v Lease charts top
2015.05.20 Purchase v Lease charts bottom
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

With an annual cost to own of $148,854 or $6.20 psf, and an Indifference Point of $2,300,000, the client in this case may end up saving over $300,000 by purchasing the building.