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Should you buy or lease?

Which makes more sense for a brick-and-mortar store: leasing space or buying property?

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By Georganne Bender
By Rich Kizer
Published: May 4, 2017
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buy or lease
Question: Which makes more sense for a brick-and-mortar store: leasing space or buying property?

Answer: In the retail world, there’s one golden rule about selection of space: location, location, location. It’s critically important to find the space that’s right for your business—space that offers the opportunity to build retail success now and in the future.

Buying a building can be an excellent investment strategy when compared to leasing. The question here is financial: Is the money you put into buying the building over and above the investment you’ll need to open and operate the store? You need to be sure this large investment will not put you “behind an eight ball.” As a building owner, you may also find yourself having to put large investments into the building, which under a lease you would not be required to make.

If you’re thinking about purchasing a building, you need sound advice from qualified people. Meet with local experts and ask for their opinion on the building you’re thinking of buying. Is it a good value? What future demographic shifts do the experts believe will take place that will affect this location? Center your questions on the future development strategies you need to be aware of to help you make the right decision. In both buying and leasing a property, these are your must-know issues.

The benefit of leasing is flexibility—you’re only married to a location for a pre-determined period of time. Leasing also means that you’ll likely have more available funds to operate the store, and you’ll probably avoid expensive building-improvement costs.

There two types of leases: gross leases and net leases. A gross lease has one specific amount that you’ll pay in rent each month. There are no surprises as taxes, building insurance and maintenance are wrapped up in the amount of rent you pay. A net lease consists of rent only, plus billings quarterly, semi-annually or yearly for taxes, insurance and maintenance. Under either type of lease, you’ll most certainly have the responsibility of common maintenance expenses for HVAC, plumbing and the usual upkeep requirements.

Rent will always be negotiated in terms of dollars per square foot for the space. Be sure to inquire about a number of available spaces for rent in your market—this is mandatory—to get an idea as to what you’ll be expected to pay for a specific location. Doing your homework prepares you to be able to strike the best deal for your store.

Leases have terms—say, five years—with the important options of adding two or three more five-year extensions at a predetermined rental rate, or based on an increase that’s tied to the Consumer Price Index (CPI). It’s critical to make sure you have more than just a single-term three- to five-year lease, and always have your attorney review the lease and advise you in all transactions concerning it. You’re leasing this location as a home for your store; moving can be costly and very challenging in terms of reshaping customer shopping habits. Someone who shopped with you at one location may not follow you to another location.

You also need to take into consideration necessary leasehold improvements. These can include painting, lighting, flooring, etc. Who does the leasehold improvements, and who will pay for them, is negotiated during lease discussions. Think about what you want to do, and spend time visiting other stores for ideas of what you may want for your store.

During lease negotiations, you must also address the right to sublease the space to another tenant. You might not be thinking about that now, but it may be important to you in the future. During the sublease period, you are still required to pay the rent to the landlord; you must also collect rent from your tenant.

You can also negotiate Right of Assignment. Assignment, like subleasing, gives you the right to assign the lease to another tenant. What makes Right of Assignment different from subleasing is that it releases you from any further obligations to the landlord. Again, this needs to be negotiated and written into the lease.

So, whether you decide to lease or buy requires due diligence on your part to make the decision that is right for you and your business.

NOTE: We are not attorneys. This article is not meant to offer legal advice. Before leasing or buying a building, always secure an attorney to receive proper legal advice on everything discussed in this article.