Buying vs. Leasing Commercial Space: Pros and Cons for Franchise Tenants
As we explain in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, the most common reason tenants lease space instead of buying a location is because of availability – or a lack thereof. Ninety-five percent of all commercial space is for lease and not for sale.
If you are in an enviable position to purchase property there are several opportunities available to you: a business condo where you occupy the one unit, a strata title unit, small strip plazas or centers where you’re now a landlord to other tenants as well, or standalone buildings on a small parcel of land. Major factors that impact this decision for the average franchise tenant are the long-term commitment of purchasing a building and the ability to obtain the financing (you may have been financially stretched with paying a substantial franchise fee)
For those franchise tenants able to purchase, here are a few pros and cons to consider.
Paying a mortgage is better that paying rent. Lease payments are forever, but your mortgage will eventually be paid off. Often, your mortgage payment may be very close to your rent obligation.
In most cases, you will gain equity in your property. Over the course of time, your property may double – or even triple – in value. This increase in value is in addition to the value of your business contained within the property.
You’re in charge. You don’t have to deal with the hassles of a landlord or property manager.
There may be some sacrifice on location, because many of the prime locations may not be available for purchase.
If you’re vacating an existing location (with regular customers, leasehold improvements, and fixtures in place), you may be leaving a great opportunity for a competitor to move into your location.
Being in charge is a con as well as a pro. When you purchase property, you’re the one responsible for all repairs and maintenance that a landlord would normally handle.
When making the decision to purchase or lease commercial space, don’t make the decision to buy simply for the sake of owning real estate. Only consider purchasing a space or property if you would be prepared to lease that same location anyway.
Also, when deciding to purchase or lease, remember to think outside of the box. What we mean here is consider all opportunities – both conventional and unconventional. We live in an “anything goes” or “whatever works” society and that philosophy often applies to business locations as well. A major restaurant chain located near The Lease Coach office went under and the freestanding building was quickly snapped up by a group of doctors for new office space. A former residential property can be converted into a hair salon or massage clinic. Another tenant moves in where a fitness facility failed and so on.
There are both conventional and unconventional opportunities for every business industry. Perhaps a trophy location will make sense for your franchised business? This is a specific unit that outshines all the other spaces for lease or purchase in a property because of its prominence and visibility. Trophy locations do not sell or lease cheaply; however, for some franchise tenants, having a trophy location can make their business far more conspicuous. But do all franchise tenants need to be located in the same type of buildings? Of course not. You need to evaluate every type of building or property that is available because its unique qualities can represent the 20 percent advantage you need to be successful over your competitors.