3 options for occupying your office space
Lease-to-buy options offer more flexibility
When choosing an office location, business owners are faced with a myriad of decisions - not the least of which is whether to buy or lease the property. Potential buyers have another option: a lease-to-buy plan, which gives tenants the flexibility to decide later on if they want to buy.
"Considerations for the user of commercial property would allow tenants to occupy the building without the initial capital investment of down payments and closing costs," Lavista Associates President Tom Davenport says. "The consideration for the owner of property would be to expect income quickly to cover its investment costs and any associated and applicable debt service expenses."
According to Davenport, there are two choices associated with lease-to-buy options:
- Arrange a purchase option, in which the tenant will be able to purchase the property at either a negotiated price up front, or at a third-party term and price
- Have a purchase agreement written into the lease, with a set price and terms for the tenant.
"The advantages of this agreement for the user would allow it to, in essence, grow into the property and decide whether they want to purchase it," Davenport says. "We see this typically when it involves a younger or growing company who would prefer to use their working capital to grow their business, rather than invest in real estate."
But the bigger question, Davenport says, is whether the owner is ready to purchase a building or to simply lease. Typically, the decision is based on three criteria:
- If the business is mature enough to accurately predict its growth needs, such as a business outgrowing its office space
- Changes in company ownership, where a sale may be required if a business entity or partnership is dissolved
- Changes in location, necessitated by the needs of the building's owner
"We typically suggest that if there are any questions by a potential purchaser of real estate on any of these three items, then to stick with leasing as the primary consideration," Davenport says.
And lease-to-buy has benefits for both lessees and owners. "It's desirable to the user because they want to use their equity for a different purpose," Davenport says. "The owner's desire is to typically generate income on the asset earlier than they may under a traditional sale model scenario."
Office condominiums may be the best bet for your relocation
Harris Medical Associates founder Chuck Harris had a decision to make. After selling his first successful business and incubating a second in his basement, it was time for the new company to leave the nest.
But what would be the right environment for a new home?
After considering options including leasing space at a traditional office park, Harris joined the ranks of many entrepreneurs who are purchasing office condominiums.
"From an investment standpoint, this was the thing to do," says Harris, whose company places physicians in hospitals and clinics when they need short-term staff coverage. He moved into a Crescent Development-owned complex on Satellite Boulevard in Suwanee. "When you take into account the appreciation of the property value and the depreciation you write off against your taxes over time, you can generate a 12 to 13-percent return."
Harris financed the purchase through a combination of a conventional and an SBA loan, along with a 10-percent down payment.
Graham Commercial Realty Senior Vice President Mike Hart expects more business owners to go condo in the near future.
"Interest in owning business condos is definitely increasing," says Hart, who connected Harris to his building. "As rental rates in other buildings have risen, the economics make a lot more sense. This is an investment where they can get money back. They can build a nice little nest egg."
Over time, of course.
"The real icing on the cake to office condo market," Hart says, "is that land will become so scarce that it's going to make these buildings - not in two years but five to seven - be at an extreme demand, and one people pay a premium for."
Hart adds that condos are not right for everyone. Ideal candidates are companies that are:
- established
- know where they want to be geographically
- understand how big they plan to get so they don't overgrow their space
In addition to the financial advantages, condo owners enjoy other features that condos offer. They include the ability to park at their own front doors, control their own utilities, maintain predictable monthly expenses, lock in a perfect location, and work in a secure site.
While office condos are sprouting all over the county, Hart expects the Satellite Boulevard corridor to continue attracting attention.
"Satellite is one of the hotter areas that's getting more activity because of its access to I-85, which is a lifeline for so many businesses," Hart says. "From there, they can go straight to the airport. It also provides a market for both higher-end and moderately-priced housing for staff."
A sale-leaseback could be right for your business
Which of these two is your company better at - making real estate deals, or running your company?
If you chose the latter but you currently own your own building, you may want to consider selling it and then leasing it back from the buyer. The move could put financial resources at your disposal that enable you to generate more revenue than you gain from owning the property.
"The sale-leaseback can be the right thing to do if you take those funds, plow them back into the business, and generate a higher percentage return than you do on the real estate," says Brad Simmel, a vice president of investment properties for the CB Richard Ellis Group. "The leaseback is common tool used every day, and you can do it with any sized asset."
While large companies including Bank of America and Wachovia report multi-million dollar cost benefits, Simmel notes that small and mid-sized companies can also take advantage of leasebacks because of the low-interest environment. Especially if they have good credit.
"Credit is essentially what drives the market," Simmel says. "If you have strong credit to back up your lease, it lessens the buyer's concerns about risk."
According to a number of sources, typical leaseback arrangements involve buildings owned by single tenants, who replace their mortgage payments with a lease that runs from 10 to 50 years. Leases often require the lessee to cover all of the operating expenses on the property.
Still, leaseback arrangements can be a plus for both buyers and sellers that allow each of them to focus on their key strengths.
>> Learn more: Contact commercial real estate specialists such as CB Richard Ellis www.cbre.com and search publications including Retail Traffic and CFO Magazine.
