There’s no question that small businesses make a big economic impact. In our state of Tennessee, business owners can thrive thanks to no income taxes, low property taxes, and one of the lowest costs of living in the country. In return, they create employment opportunities and add to the character of our local communities.
If you’re one of the hundreds of thousands of business owners in Tennessee, you may find yourself needing a dedicated office, storage, or workspace as you grow; and when it comes to your commercial real estate options, there are three main choices: buying, leasing, or building. Each option has its own benefits and drawbacks, so here’s what to consider before committing to your new space.
Evaluating Your Business Real Estate Options
1. Buying commercial real estate
Whether you want to acquire a manufacturing facility or a bright and airy space to meet with customers, investing in commercial real estate for your business can be helpful. However, there are a number of considerations to keep in mind.
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.
- Public brand: 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
- Investment: 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.
- Red tape: 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.
- 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.
- Fixed 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.
- Smaller upfront 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 hikes: 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.
- Long-term limitations: If you rent commercial property, you have less control over it 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
- Personalization: By building your own space from scratch, you can customize the building and surrounding property to suit your business.
- 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: 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
- Expense: 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: 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 a recent Forbes survey, commercial real estate and related investments were among the top reasons business owners applied for a business loan, comprising 26.8% of respondents. Business lenders know this is a leading need among growing businesses, which means that no matter which option fits your needs, goals, and budget, you don’t have to face the commercial real estate market alone. Take advantage of your relationship with local community institutions like SouthEast Bank, who care about investing in businesses like yours and who can offer personalized service along the way.
