LOS ANGELES-Nearly everyone has heard of office condominiums and owner-occupied buildings. In some cases, in fact, owning one’s own space can have business advantages, if businesses are prepared to take on the responsibility of landlords. Suzanne Lee, vice president in Transwestern’s local office, specializes in representing companies and organizations in both leases and purchases of commercial real estate. As part of Transwestern's corporate advisory services team, she is responsible for business development, transaction processing, client relations and market analysis.

GlobeSt.com: What are the advantages of owning your office space, as opposed to leasing?

Suzanne Lee: In most markets, making mortgage payments on a commercial property can be a  prudent investment when proper financial management is in place. The current moment, in fact, holds some potential advantages to ownership: advantages: Interest rates are at historic lows, and will remain so for the foreseeable future. With only 10% down on a Small Business Administration (SBA) loan, the borrower can “lock-in” rates between 4.5% and 5.5% for up to 25 years. Even if you don’t remain in the building forever, you have a potential upside when it comes time to sell the space.

GlobeSt.com: How does the decision to become one’s own landlord affect your business overall? Are there advantages to owning your own space?

Suzanne Lee: Some expenses associated with owning and operating commercial property, such as interest payments and property taxes, are tax-deductible. With these deductions, many companies find ownership to be economically preferable to leasing, particularly on a post-tax basis. And being an owner occupant offers some excellent opportunities for corporate image-building.  You have near-complete control over signage, design, amenities, parking and nearly every other aspect of your business as reflected in your base of operations.  This level of control may be especially beneficial for specialized businesses, such as life-sciences laboratories, where tenant improvements are specific to that industry.

GlobeSt.com: Aren’t there downsides to owning your own space?

Lee: Yes, of course. You have all the day-to-day responsibilities of a landlord. Repairs, maintenance, insurance, security-all these land in your lap. Although many tasks can be outsourced to a property management firm, many first-time owners tend to underestimate the time involved in being a landlord.

Also, as opposed to leasing, in which costs are amortized over a period of many years, you may have significant upfront costs before you can move in. The down payment and other closing costs may have a significant impact on a business’s short-term cash flow. Additionally, many buyers have time remaining on a lease at their previous space and may be responsible for lease payments as well as mortgage payments on the on the purchased property. And in contrast to leased space, which can be upgraded to suit tenants, properties for sale are typically available in an “as is,” condition, which may not be a perfect fit for your needs. This issue can be addressed by having rehabilitation or tenant improvement funds built into the financing, however. 

GlobeSt.com: Are there any special tax advantages-or disadvantages-to owning one’s own commercial space?

Lee: For owners, the flipside to building equity is depreciation. Rent is an expense that can be deducted.  For owners, however, property is depreciated over 39 years, and only interest payments and operating costs are tax deductible.

Other risks of ownership include the danger of outgrowing your space or, conversely, needing to downsize. Your options are limited in both instances. In becoming a landlord, you are essentially entering into a second business, and one that is subject to the ups and downs of real estate values. You are also at the mercy of regulations, such as zoning restrictions, ADA requirements, and many other issues.

GlobeSt.com: It’s still a tenants’ market out there. What are the advantages of remaining a tenant?

Lee: Responsibilities are far fewer and flexibility is far greater for tenants in regard to facilities management. Many landlords will provide excellent, professional build-outs or improvements to suit your specific needs. Leases are generally easier to budget for in your balance sheet.  Landlords still offer good-credit tenants top-of-the-line concessions in the form of low rental rates, free rent, tenant improvement allowances, discounted parking, signage and moving allowances. Early lease renewals, or so-called “blend and extends,” provide an excellent way to restructure the lease and significantly reduce occupancy costs in advance of a tenant’s scheduled lease expiration.

GlobeSt.com: Do new Financial Accounting Standards Board (FASB) rules represent a possible downside to leasing?

Lee: The recently revised FASB standards are expected to complicate accounting for any company that produces financial statements in accordance with Generally Accepted Accounting Principles (GAAP). A lease will appear as a declining liability on your books, and you'll no longer be allowed to amortize lease liability on a straight-line basis. Currently, leases are treated as “off balance sheet” transactions, which many businesses prefer.