Is now the time to buy?

Law Talk – By Denice A. Gierach – As published in The Business Ledger – June 1, 2009

During this stressful time in the economy, many businesses have retrenched, making the decision to stay in their existing space, where they continue to rent.  While this may sound like a good idea, especially if you have had to cut back staff as a result of the loss of some customers, is it the right decision in the long term?

It is true that in the short term, landlords are giving great deals to tenants to keep some rent flowing.  This is always the case in times of recession, where there are not as many new prospective tenants competing for the same space.  However, even though this may be the case today, it will not be so in the future.  When business conditions improve and there are many more tenants out there, count on the rental rates to rise.  Even now, if you are entering into a lease that is greater than two years, there are rental escalation clauses contained in them.  If your proposed lease is longer than five years, each year thereafter will contain a rent increase, as the landlord’s expectation is that the amount of available rental space will be less, thereby increasing the rental rate.

Another approach might be to fix the payments that you will have to make over a longer term by purchasing a property or office condo.  Today, a qualified purchaser can get SBA type financing at a current rate of approximately 5.17% fixed for twenty years.  This is a historic low for the SBA interest rates and should not be ignored.  In addition, with the American Recovery and Reinvestment Act of 2009, the legislation eliminated certain fees for the loan by 63%.

With these low rates and the reduction of the fees, it may make sense to fix your payments for the next twenty years, instead of allowing the monthly payments to increase, which will definitely occur if your business leases instead of purchases.  If you decide to buy instead of lease, your payments will not be too different from your current rent payments and will definitely be better than the expected future rental payments.

For instance, if you bought a 6,000 square foot condo brand new, you might expect to pay $1,800,000 built out (depending on the location of the condo and the finishes that you use in the buildout).  Based upon the above rate, you would be paying a monthly payment of about $12,600.  If you rented in the same brand new building, you might have to pay a portion of your buildout and a monthly rate of $20 to $24 per square foot, which result in monthly payments of between $10,000 and $12,000, making your decision to own versus rent almost a wash.

However, in the future when the rental rates increase from five years out moving forward, you are still fixed in the amount you pay in monthly payments, if you elected to own rather than rent.  Although one cannot count on the appreciation that you might have on the building that you purchased in future years, when you retire some years out, you will have a building that you can rent to another business, creating an additional income stream to you in your golden years.
Another reason to look at buying is a noneconomic one.  If you have lost business and have had to furlough some of your workers, this certainly affects your employees’ morale.  In the meantime, you are trying to retool, market and create your niche in the marketplace that will put you at a competitive advantage when the economic conditions improve.  If you buy your building or condo, you can turn this negative morale into a more positive situation.  There is a certain energy that results from being in a new building.  You can do a buildout that is more in tune with the direction that you expect your company to go in the future.  As a result, your employees’ morale will also improve.

These days everyone talks about green buildings.  Another positive about buying your building or condo is that you may be able to buy a green building that is LEEDS Certified.  If you are a larger company, you may have a corporate sustainability program, which is enhanced by your choice of this new building.  If you are not large, you can still show your constituents that you are a good corporate citizen.

For all of these reasons, before you sign another lease, examine the possibility of purchase first.