When a growing small business reaches that point where operating from a home office is no longer an option, the owner is faced with the choice of buying, leasing or renting office space. There are plenty of other articles on the Internet to help you through the legal and financial options of leasing over buying, but most do not address the potential of renting office space without a lease at an office business centre. For the purposes of this blog, we will define the three options more practically.
Buying office space: This would be space within an office condo complex or a business complex, but it could also be a stand-alone building that is not in a business area.
Leasing office space: This refers to traditional raw office space that is in an office building or tower, meaning that the space is yours to set up as you like.
Renting office space: It could be located in an office tower within a business centre that offers serviced offices. It could also be furnished or unfurnished, depending on your wants and needs.
Lets first examine the financial requirements and commitment that is required of each.
Buying Office Space: In order to purchase office space, you must make a down payment and arrange a mortgage. But locking in your commercial mortgage long-term can give your business clear, fixed costs for years to come. If your need to change, you just have to sell the space and acquire new space, so the commitment level is up to you. Do not forget that there are property, appraisal and maintenance costs and possibly property improvement costs.
Leasing Office Space: Most often, you will need to sign a long-term lease of 3 to 5 years, but 10-year leases are sometimes required to lock in a fixed price. The only problem with this arrangement is that if market prices for that space go down, you are still on the hook for the higher price for the term of the lease.
Renting Office Space: While the rent may fluctuate on a yearly, bi-yearly or 3-year basis, by not having a lease you are typically only required to give 60 or 90 days’ notice of leaving that office space.
Some perks of buying, leasing or renting
Buying Office Space: You own the space and you can do whatever you want in terms of configuration or use (as long you follow zoning laws). You can also rent out or lease unused space to another company. The property will appreciate and will earn additional value when you sell and retire.
Leasing Office Space: Traditional raw office space can be configured and re-configured as you like. Typically, there are no additional maintenance costs associated with the upkeep of the building. These costs are included with your rent.
Renting Office Space: You have a choice of a furnished or unfurnished space that does not require infrastructure costs for wiring or leasing a telephone system. You have a turnkey office and can start working almost immediately.
Potential financial cons of owning, leasing or renting
Buying Office Space: Depreciated value of the property is one thing. But if the assessed value goes up, you could face paying capital gains taxes when it comes time to sell. This can be most painful if you are selling because the business is not doing well.
Leasing Office Space: Sometimes business is doing as well as expected but you need to close it down. In this case, you are personally still on the hook for the remainder of the terms of the lease. Your only hope is that there is not a “no subleasing” clause in your lease.
Renting Office Space: If you need to move out of a business centre with all the infrastructure and office equipment that you pay for as you use it, you will need to lease or purchase this equipment in another facility that is not serviced.
Location of your office space
Buying Office Space: It can be quite difficult to find downtown property that is affordable for a small business to purchase, but a new trend in condo/office buildings is selling office condos in new developments downtown.
Leasing Office Space: There is plenty of available space in prime locations. You just need to establish which building is in the right commercial class for your business and your budget.
Renting Office Space: The choices are many, as there are office business centres in almost every upscale downtown office building. The choice is yours to find the right address and rent that fits the needs and wants of your business.
Business growth or downsizing?
Buying Office Space: When you need to grow the space beyond what you already own, your options are limited. It may require buying additional space or renting excess space from a neighbouring business. But if you find yourself needing less space than you own, you can get additional income by renting out your extra space.
Leasing Office Space: Trying to find additional office space on the same floor is often not easy – so you may find yourself having to sign an additional lease for more office space. When you find that you have more space than you need, you could again rent out that extra space to another business. The only problem with renting out extra space is that it may not be allowed under the terms of your lease.
Renting Office Space: Office business centres are prepared for your office needs to increase or decrease. They can also make your changes seamless. If you need more space, they can accommodate your growing needs without having to change your address or phone number. When you find that you need less space because of outsourcing or downsizing, an office business centre can find you more suitable space in the same facility within days or even hours, without interrupting the running of your business.
As you can see, the answer to buy, lease or rent office space is not a clear-cut and easy decision for most small business owners to make. Your decision will hinge on a combination of financial, flexibility and personal-choice issues. Do not forget to bring in your financial experts and advisors to help you make the right decisions for your business. The choice is to make the decision that is best for your business needs, wants and financial ability as a start-up business.