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Understanding the Differences Between Leasing and Owning Commercial Property

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Commercial real estate has evolved in a way that many businesses prefer to lease than own property. Businesses ready to lease may either lack sufficient capital to buy commercial property or they may have other ideas for investing. Here’s a look at the differences between leasing and owning commercial property.

Why Commercial Leasing Is Popular

Not all businesses plan on operating in the same headquarters permanently. Some operations are set up as temporary in the first place until the next major stage of development, which might involve being acquired by a larger firm. Leasing in the short term is an efficient option for such companies.

Some short-term ventures aren’t necessarily fly-by-night operations, as they might exist for one short-term purpose, such as fundraising to pay for disaster relief.

Entrepreneurs with a limited amount of capital might prioritize investing in equipment rather than investing in real estate. Buying property as a startup can tie up capital for years. Some companies are more concerned about means of production rather than a business location.

Investing in Commercial Property

One of the main reasons why a business invests in commercial property is to protect the value of its assets. Investing in real estate can potentially increase the business’ net worth significantly. This is because it allows for asset growth rather than diminishing capital on disposable lease payments.

Another reason for an enterprise to explore commercial real estate is to simply have more control of its operation. If you lease a space, you must conform to the owners’ requirements and avoid modifying the property. Owning commercial property allows you to do more of what you want without seeking permission.

In many cases, commercial property is worth more than the underlying business that occupies it. Sometimes the property is the business itself, such as a campground, farm, or outdoor venue. It’s possible for the owner to earn no income from the business model yet experience enormous property value gains.

Qualitative Aspects of Owning and Leasing

While leasing can lower fixed costs, it also increases the risks of losses since someone else is in control. Therefore, you have to be more careful to ensure all your valuable possessions are protected with renters insurance.

Your after-tax loan rate is another qualitative issue to consider when investing in commercial real estate. It’s advantageous to conduct a comparative cost-benefit analysis on owning versus leasing and preserving capital.

Check for lease and loan cash discrepancies, tax rates, and hurdle rates before making a final decision.

Both owning and leasing commercial property have their unique advantages. Owning property can help drive up asset value, while leasing property might be more convenient.

Are you looking to buy or sell a home in the Hermosa Beach area? Contact our experts at Brighton Escrow today. We are happy to offer you a top-tier escrow service.