Is it better to own or lease business real estate?

Often the choice to buy or lease space is ego driven rather than making the best business decision. In my opinion, leasing is usually the better option. We've all heard stories about fortunes made in real estate. But real estate can also be burdensome and may distract you from their primary mission -- to make your business successful. A lesson can be learned from major corporations who choose not to own their buildings. Here are some of the reasons.

1. Flexibility. Leasing affords more flexibility to increase or reduce space as needed. It's a lot easier to renegotiate your lease than dispose of a building in a soft market.
2. Market fluctuation. Timing the market is essential when buying and selling real estate. Professionals are better at it than novices. Too often novices buy at the top of the market and sell at the bottom.
3. Business vs. real estate needs. Business owners often make real estate buying decisions based upon the needs of their business rather than the real estate market. The best time to liquidate real estate may not coincide with the time to sell the business.
4. Managing real estate. Your business may be neglected because of real estate management distractions. Real estate management is a skill best left to professionals.
5. Your exit plan. Selling a business and real estate together may be more difficult. One will have a diminished outcome.
6. Working capital is compromised. Precious working capital will be tied up in the real estate. Lenders require a substantial down payment that could otherwise be used in your business.
7. Better tax break leasing. You can only write off interest expense (not amortization) on the mortgage while lease payments are 100% tax deductible.
8. Cash crunch. You may incur phantom income when selling your depreciated building. Phantom income is taxable profit without corresponding cash flow.
9. Financial ratios. Income to asset ratios are better when leasing than owning real estate. Some lenders consider that important. The romance of owning real estate can be compelling but leasing may be best for you.

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