There’s no question that small businesses like yours make a big economic impact. In our state of Tennessee, business owners benefit from no income taxes, low property taxes, and one of the lowest costs of living in the U.S. In return, they create employment opportunities and shape the unique character of our communities.
If your business is growing and you need a dedicated office, storage, or workspace, there are three primary options to consider: buying, leasing, or building. Each route has its own set of benefits and drawbacks. Here’s what to know before you commit.
Evaluating Your Business Real Estate Options
1. Buying Commercial Real Estate
Whether you need a facility for operations or a welcoming space to meet clients, purchasing commercial real estate can be a smart move. Still, it comes with a few key considerations.
Pros
- Equity: When you buy a property, you can build equity when you pay off the mortgage. Over time, your property can also increase in value. You may be able to leverage this equity for further business growth, whether it’s for equipment financing or a business line of credit.
- Tax Benefits: As a business owner, you can take advantage of tax credits and deductions if you decide to buy a workspace. You may be able to deduct your mortgage interest, property taxes, and the cost of furnishing the space.
- Brand Credibility: By building a new facility, you show the public that you’re a legitimate company with roots in the community. Having a physical presence that you own can make customers feel that you’re more reliable.
- Control: Because you own the property, you hold control of it. If you want to renovate, add a security system, or switch to more environmentally friendly lighting, you don’t have to get approval from a landlord. You can just do it!
Cons
- Upfront Cost: Buying commercial real estate will require a significant capital investment, and you’ll have to pay a lot of money upfront. Most commercial real estate buyers must secure financing in order to make this move, which comes with its own risks and rewards.
- Regulatory Hurdles: Buying a property and converting it to your needs can come with some headaches as you deal with state and county licensing and permit requirements.
- Long-Term Commitment: Deciding to buy property can be a good idea, but it’s a serious commitment. If your business experiences a downturn or you decide to relocate, it may be challenging to sell your property and recoup your investment.
2. Leasing a Space for Your Business
If you don’t think buying commercial estate is right for you, leasing can be a viable alternative. When you lease a property, you have more long-term flexibility but might also have certain limitations based on your landlord and lease.
Pros
- Mobility: When you lease a space, you have more portability than you would as an owner. If the location isn’t as good as you thought, or you realize you need a bigger space, you can easily relocate at the end of your lease.
- Predictable Costs: Since you’re leasing the space, you’ll have a fixed monthly rent to worry about. Having a set cost every month can help you plan more effectively.
- Lower Initial Investment: When you lease commercial property, you typically need a hefty security deposit. However, that deposit will likely be much less than you’d need for a down payment for buying a property.
Cons
- Rent Increases: As a renter, your landlord can decide to increase the rent when it’s time to renew the lease. Depending on how much notice you receive for increases, it may be hard to pivot your business finances accordingly if you want to remain in the space.
- Less Control: If you rent commercial property, you have more limitations over its use than you would have as a buyer. Your landlord can decide to sell the property at any time, or you may be asked to leave at the end of the lease.
- Space restrictions: Because someone else owns the space, you may be limited in what you can do to modify it. For instance, you may be unable to knock down walls or widen the parking lot.
3. Building a Custom Workspace
If you’re unable to find a current structure to buy or lease, you may be considering building commercial real estate specifically for your needs. This is a significant investment, so let’s talk about the advantages and drawbacks.
Pros
- Customization: By building your own space from scratch, you can tailor the building and surrounding property to suit your business.
- Strategic Location: If you decide to build your own space, you pick the location that’s best for you rather than being limited to what space is open. This is particularly helpful if you need more square footage to operate in, want to tap into particular local resources or traffic flow, or want to fit into a neighborhood with limited available space.
- Equity Potential: By developing raw land, you can build equity over time and increase the property’s value. This will help you with future financing leverage or if you choose to sell the property at some point in the future.
Cons
- High Cost: Purchasing land and developing a building from the ground up can be a huge expense, and often it can be much more expensive than buying or leasing an existing structure.
- Potential Delays: Building a property will require you to get permits from your county or city. Depending on the red tape involved, the permitting process can delay construction and cause you to miss out on work.
- Time Investment: If you decide to build commercial real estate, be aware that it can be a lengthy process. Depending on your location, it can take months or even years from start to finish.
If you’re a business owner, your business location plays a big role in your operations and profitability. By evaluating the advantages and drawbacks of buying, leasing, or building property, you can make the best choice for your bottom line.
Financing to Fit Your Business
According to Forbes, commercial real estate is one of the top reasons business owners apply for financing. Whether you decide to lease, buy, or build, securing the right funding will help you move forward with confidence.
At SouthEast Bank, we understand the needs of our small business neighbors. From commercial loans to equipment financing, our team can help you find the right solution to support your growth. Visit your local branch or explore our business banking solutions to get started.
