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Buy or rent? Agents: Merits to purchasing, leasing space

For small businesses deciding whether to buy or lease space in the down economy, both options are beneficial depending on the use, said regional commercial real estate agents.

A business that might outgrow a space or change its business model should lease space, Campbell said. It always comes down to the financial condition of the business owner, too, but there are more aggressive deals to be had in leasing than there are in owning, he said.

“It’s not the worst thing to lease and bank the difference and invest in different things. There shouldn’t be that much difference in your occupancy costs whether you own or lease,” Campbell said.

Buying a bigger building and trying to lease extra space a company doesn’t need is tough because few businesses are looking for space in this economy, Campbell said. Companies should look at rental costs as a tenant versus operating costs as a buyer, he said. If operating costs far exceed rental costs, then a buyer has bought too large of a building, Campbell said.

It’s dangerous buying a building because should the business have to move, it is going to have a tough time selling the property and will have to slash the sale price, said Rick McGinnis, division president for Susquehanna Township-based Highpointe Commercial Realty Advisors.

Building owners are lowering sale prices by at least 25 percent, McGinnis said. And those leasing space are giving small businesses incredible prices, he said.

Normally, business owners knock 20 percent off of monthly leases to get tenants in the retail sector to move into spaces or stay in a building, McGinnis said. In one space McGinnis leased, he said, a building owner knocked half off the lease price to get a restaurant to stay. That is the only time he has seen a lease dropped that dramatically, he said.

The office sector isn’t much better off, he said. In most instances in the retail and office sectors, building owners are offering tenants free rent upfront as they finish renovating spaces they are moving into, McGinnis said. They also give tenants money to help remodel the space to suit the business’s needs, he said.

Even if a business wants to buy a building, it is going to have a tough time getting a bank to finance the deal, McGinnis said. The investor has to have a relationship with a bank and top-notch credit, and even then the bank might not loan the business enough money to pay the asking price, he said.

Lenders are scrutinizing appraisals harder, McGinnis said. For instance, if a property owner wants to buy a building appraised at $400,000, the bank might only lend 75 percent of the price because it doesn’t think the building is worth that much, he said.

“Banks are getting funny with the appraisals,” McGinnis said. “They keep saying, ‘We have money, we have money (to lend).’ Yeah, but you (the banks) are twisting guys’ arms to finance.”

Small business owners need long-term strategic plans regarding their real estate needs, said James L. Helsel, president of Helsel Inc. Realtors based in Camp Hill. Helsel also is the immediate past treasurer of the National Association of Realtors and speaks across the U.S. to groups looking to expand their businesses.

Something a business should consider is if it is better to invest in property or in its inventories, employees and marketing strategies, Helsel said.

Another thing to contemplate is whether the business will own the property or will the business owner control the property and lease back to the business, he said. The latter provides stability for the owners and the business because the owners control their destiny and are not subject to the same market pressures that are present in leasing to unrelated entities, Helsel said.

For small businesses, the overarching question is their financial capabilities, he said.

“There are opportunities for small businesses to purchase business locations that may not have existed several years ago. The unfortunate reality is that financing the purchase is more difficult than it has ever been,” Helsel said. “I really don’t think this is as much a question of the type of business you have as much as it is about what are your financial capabilities, which always have and always will, to a great degree, drive the location and method in which a business determines its location.”

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