The decision to own versus lease your office can have a significant impact on your business. For newly established practices that lack sufficient capital to purchase their space, the decision to lease is obvious. For most practices however, the choice isn’t as clear. Let’s first take a look at the advantages and disadvantages of ownership.

 

There are several advantages, both qualitative and quantitative, to ownership. With freestanding buildings, ownership gives you control to operate and modify the building as you see fit.

 

Being able to change the appearance of a property and place highly visible signage can be one of the best marketing tools for your practice. With condo offices, ownership gives you long term stability and control over your occupancy costs while still giving you flexibility to design and modify your space as your practice evolves.

 

The financial benefits of owning include tax savings, potential appreciation and additional rental income. The tax savings come from depreciation allowances and mortgage interest paid during the holding period. Appreciation comes from capital gains proceeds at the time of sale.

 

Over most ten-year holding periods, real estate has historically appreciated in value. However, as the past decade has shown, there can sometimes be significant peaks and valleys in the real estate cycle so timing can play a part in the appreciation factor. Constant advances in medical technology and a building’s ability to adapt its infrastructure to accommodate those advances will also have a significant impact on a property’s residual value.

 

If a portion of the property is rented, income from the other users can be used to pay a portion of the mortgage on the property, fund your practice, or be used for any other use as you see fit.

 

There are also disadvantages to ownership and these should be weighed before making a decision to purchase rather than lease. The initial cash down payment to acquire a property is cash that could otherwise be used to fund the growth of your practice or for other investment opportunities that are available to you at the time of purchase.

 

Financing commercial real estate purchases requires strong financial statements on the practice and oftentimes requires the personal guarantee of one or more of the partners. Also, the addition of long-term debt on the balance sheet can make it difficult for some practices to qualify for additional financing down the road.

 

As the owner of the property, you also bear the risks associated with property damage, safety of the building's occupants and visitors, functional obsolescence, illiquidity, and changes in codes or zoning ordinances that may be unforeseen.

 

As with ownership, leasing your medical office has both qualitative and quantitative advantages.

 

With leasing, you have the flexibility to easily relocate your business at the end of the lease term. Perhaps you would prefer to be in a different market or there is a more prestigious and or modern building in a better location down the street or you’ve simply outgrown your space.

 

Leasing eliminates most of the risks of building ownership discussed earlier. It also frees you from the burdens of property maintenance and other property management issues which now become the responsibility of the landlord. Leasing frees up cash that can be used to fund the growth of your practice. Typically the only cash outlay required in a new commercial lease is one or two months rent value as a security deposit. By contrast, purchasing your space can require down payments and closing costs totaling up to thirty percent of the purchase price, less if SBA financing is available.

 

The main disadvantage of leasing is that you won’t build up equity in your property. As mentioned earlier, real estate has historically appreciated in value over most ten-year holding periods. If the holding period is increased to twenty or thirty years then the appreciation can be significant.

 

When you lease your space, there is less flexibility in the modifications that you can make to your space. Even if those modifications are paid for entirely by you, the Landlord has the right to disapprove them if he/she feels the improvements will make it harder to re-lease the space should you decide to relocate to another property at the end of the term.

 

Unless you have negotiated renewal rights into your lease agreement, you are not guaranteed the right to remain in your space at the end of your lease. Perhaps, the adjoining suite is occupied by a tenant that is running out of room and needs to expand into your space. If the tenant currently occupies a significant amount of space in the building or is a key tenant within the building (imaging center, lab, pharmacy, etc.) then the landlord will have no choice but to decline your request to renew and keep the key tenant instead. However, he/she may offer you the option of relocating to another space within the building if it is available.

 

The lease vs. buy decision is not an easy one for most practices but if you understand the advantages and disadvantages of each, chances are you’ll make the decision that’s right for you. One thing is for certain – one size does not fit all.