BUYING V. LEASING: PROS AND CONS
To buy or not to Buy, that is the question. Starting a business can be tumultuous and stressful time, filled with big decisions that could make or break the entire business. As a Law firm and a brokerage we get asked a multitude of questions like; How to get a license?, how long is it going to take? How much money should I have? When will I see a return? All of these questions are important to think about when starting a business, but a lot of those questions are pretty simple to answer. However, one of the trickier questions we get almost every time a prospective client is doing their due diligence is, “should I buy or should I lease my Property?” ” When we are asked this question we have the oh so dreaded answer of “it depends.” “It depends” is such a classic attorney answer that makes you question why you have one in the first place. However, there are many pros and cons to both leasing and or buying which we will discuss and should be considered.
Buying: Pros
Building Equity: Owning capital and building equity has proven over the years to be one of the safest and best ways to build wealth. If you decide to buy a property and your business ends up failing or wavering, you won’t be left completely empty handed because you will still own the value of the property.
Depreciation: As we’ve discussed in our earlier article, 280E is the dreaded tax code that limits the tax deductions a marijuana business in Michigan can deduct because marijuana is still federally listed as a schedule 1 drug. However, your building’s depreciation is one of the main tax breaks that is allowed for a marijuana business IF you own the building.
Renting out Excess Space: It is already difficult enough to try and find the perfect location, but trying to find the perfect building attached to the location can be even harder. If you find a spot with a building that has excess space, you can always section off the building, use what you need and then rent out the unused space for another income stream. Whereas, when you lease, you may love the location but realize you will only be able to utilize a fraction of the square footage and left paying for space that you won’t even utilize.
Buying: Cons:
Expensive: It’s no secret that starting a business can be a front-loaded capital-intensive time, and most sellers won’t sell their property on a land contract without at least 20%-30% down. If you’re looking for a green zoned commercial property, with a great location, you could be staring down the gun of a couple hundred thousand dollars down-payment on top of all of your other startup and licensing costs.
Location: If money is no issue, then finding and buying the perfect piece of real estate right downtown in your desired location will be a breeze. However, if you are like most people with budgets, in order to stay within your desired price range you may have to consider purchasing property in a less expensive market, which might mean further commutes or less foot traffic.
Startup time: If you are set on owning the property from which you operate, you may have to compromise on your launch date. With a lot of money tied up in your real estate, it may take a bit more time to get operations started with limited funding.
Leasing Pros:
Costs: As I outlined above, the startup costs of owning a property can really hinder a businesses’ ability to be operational. With no down payments on your books, you can use your capital to become operational faster, and start generating cash flow.
Location: Especially for retail marijuana businesses, having a great location, with lots of foot traffic, visibility from main roads and access ramps can be hard to come by; but location can make or break an entire business. The willingness to lease might allow you to afford more expensive locations that could propel your business into the black that you might not have otherwise been able to afford if you were looking to buy.
Maintenance: When you’re running a business, you might not have the time to be bogged down with simple but costly delays in maintenance and upkeep. Being able to negotiate maintenance terms into your lease might be crucial to keeping your focus on running a profitable and successful business.
Leasing Cons:
Risk: Like I mentioned above, in the unfortunate event that your business fails, and you own the property, at least you would be able to cut your losses and sell the land or try and start over with new investors. However, if your business fails and you are only leasing your property, you’ll most likely be left with nothing and having to sell off your assets to fulfill the likely long-term lease agreement you signed.
Options: If you are set on leasing instead of buying, that could potentially limit where you can set up shop. A lot of sellers are looking for a big pay day when they realized they’ve stumbled upon some green zoned property. There may be significantly less owners leasing property, because they are just looking for more of an upfront payday opposed to a long-term investment through leasing their property.
Fluctuating costs: Unlike buying, where you either get a traditional loan or a seller financing deal and your monthly costs are locked in and consistent, with leasing, you can be at the mercy of your landlord. Depending on what type of lease you sign (Triple net, Gross, Percentage), at some point when your lease is up, you might be subject to a rent increase.
As you can tell there a number of different factors that play into the decision to buy or lease. As a law firm and a brokerage we usually ask our clients to explore their purchasing options before looking into leases, but there is no one size fits all answer to this question; so the answer to the question “just depends.”