Should You Be an Owner or a Renter?

//May 7, 2007//

Should You Be an Owner or a Renter?

//May 7, 2007//

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What works for one firm may not for another.BIZ SPOTLIGHT – Small Business

For China Shipping, the choice to purchase—rather than rent—a 60,000-square-foot Montvale building to house its North American headquarters was relatively straightforward, says Geoffrey Schubert, a senior vice president at CB Richard Ellis in Saddle Brook. Cultural considerations dominated the buy-v.-lease decision, he says. But for many companies, it’s not so simple.

“Chinese and Korean enterprises tend to favor owning over leasing,” says Schubert, whose company represented China Shipping in the deal. For most U.S. companies, however, he says, “there are a variety of considerations when it comes to a buy-or-lease decision.”

Right now, for example, Schubert says, concerns over increasing corporate consolidations and potential hikes in interest rates have pushed many companies to put buying plans on hold.

In addition, “space needs and long-term plans can play a big role in a decision to buy or lease space,” says Schubert. “For example, a short-term lease may not be justified for a 150,000-square-foot facility, where build-out costs can be extensive. On the other hand, a company that needs 5,000 to 10,000 square feet may be better off leasing.”

A business’ life-cycle stage is worth considering, too, says Gil Medina, the East Rutherford-based executive managing director of Cushman & Wakefield’s New Jersey operations. “A new company or other enterprise that anticipates a lot of fast changes may consider the flexibility offered by leasing,” he says. “A mature company with a more-established business model might be better off buying.”

The type of business matters also. “An enterprise in the biotech or other high-tech space, where rapid change is likely regardless of the life-cycle stage, may want to lease its space,” Medina says. “But if your business operations require you to remain in one place for a long time—say 15 to 20 years to avoid disruptions—the pendulum swings closer to an ownership model. The same holds true if a business plans to make a lot of leasehold improvements to its facility. It can take a long time to recoup the investment, which may favor owning the space…”

Finally, he says, a family-owned business may look at real estate ownership as a good succession-planning tool. “If a family business or other closely held operation realistically anticipates a long-term existence, then buying its office or industrial space, instead of leasing it, may create equity,” says Medina. “Some firms, however, may not want to invest in anything other than their core business activities, and limit their financial investments to activities that directly impact the business model. It’s a decision that has to be made on a company-by-company basis.”

William Reynolds faced that kind of decision back in the 1970s, when he was co-owner of Reynolds & Schaeffer Associates, a Haddonfield management-consulting firm.

“We had been leasing space in a 10-suite office building when we got word in 1977 that the facility’s owner was thinking of retiring,” says Reynolds, who currently serves as executive director of the William G. Rohrer Center for Management and Entrepreneurship at Rutgers Camden. His company bought the building in 1977 and held it for the next 20 years.

Ownership meant that Reynolds was easily able to take on more space as his company grew from four to 14 people. The company also used the building to generate revenue by renting out vacant space to other businesses.

“We also offered our receptionist’s services to other tenants, answering their phones and acting as a general administrative assistant, which brought in more revenue,” he says. “And by 1997, when our firm sold the building, we made a handsome profit on the appreciation of the property’s value.”

An issue like return on investment (ROI), should in fact be a primary consideration, says Thomas Reilly, executive vice president at the Parsippany office of Jones Lang LaSalle, a Chicago-based provider of property- and investment-management services.

“Often, the buy-or-lease question comes down to the kind of return a company can expect to achieve from owning its facilities, compared with the returns it will achieve by re-investing in its own operations,” Reilly says. “In our experience, some companies find it’s better to lease office space, which usually fulfills a support function and does not directly generate revenue, but may buy facilities that are used for manufacturing or research and development, which do generate revenue.

The ultimate question, Reilly says, is whether or not the investment in real estate exceeds the ROI on a direct investment in one’s business. “Given today’s high valuations, particularly in Class A space, the returns may simply not be there,” he says.

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