To lease or buy?

March 5th 2024

Your business is growing and you are considering whether the company should lease or buy new premises. What factors do you need to take into account before making a decision?  Associate Kenny Logan from our Edinburgh office discusses the options in this article.

There are several reasons why it could make more sense for your business to lease a commercial property, including:

• Your business is growing and you are not sure how fast you might outgrow the property.
• Market conditions are unstable, so only committing to a three-to-five-year lease gives you greater peace of mind.
• Capital is tight and you don’t have enough for the deposit.
• Your company is new to a market area, or your customer base is in a tight geographic area, and the only option is to lease without losing customers.
• Your timing is immediate, and you need a building within the next 30 to 60 days.
• You have the opportunity to get favourable lease terms.

However, you should check the lease to find out who is responsible for repairs as this will affect your lease or buy calculations.

Also, lease payments are usually tax-deductible as a business expense, providing potential tax benefits.

There are also times when owning the property could be a better fit for your business, such as:

• Buying allows you to have full control of the property, and you don’t have to answer to a landlord. This means you have the freedom to modify and customise the property to suit your business needs.
• Purchasing allows you to build equity as you pay down the mortgage, providing a potential source of capital in the future.
• If the property value increases, you may benefit from appreciation when selling or refinancing.
• Ownership provides stability and the ability to establish a long-term presence in a location.

The key cost considerations for leasing are:
Monthly lease payments. You should consider the total cost of monthly lease payments over the desired lease term.

Additional costs. You should factor in costs such as service charges for common areas and solicitor fees for dealing with the lease.

The key cost considerations for buying are:
Deposit. You should consider what percentage of the total price you will need to put down as a deposit.

Mortgage interest rate. The interest that will be charged on the monthly mortgage payments.

LBTT on the purchase. You need to factor in how much LBTT will be due on the purchase.

Operating expenses. You’ll need to factor in costs such as buildings insurance and general maintenance.

You need to consider your business goals, your access to capital and projected growth. By keeping these three factors in mind, you can get a sense of what your business can realistically afford, as well as decide if that’s in line with your vision for the company. You should carry out a lease or buy cost comparison and present this to your board.

The JRW team would be happy to discuss this and similar scenarios, please do get in touch.

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