What You Should Know About Lease to Own Commercial Property

By Libbie Ballard 9 months ago

You are a business person looking to acquire commercial property to house your operation. Perhaps your company is growing and needs its own office space, industrial, or retail space. Or your company may be relocating, down- or up-sizing. Whatever your reasons, there are leasing and purchasing options to consider.

Rent, Buy, Lease-to-Own?

Master Lease

One way to acquire your commercial property is through a lease-to-own Master Lease. This can be your entre to commercial property ownership even if you do not have a significant down payment, substantial net worth, or a great credit record. In this system, the buyer purchases the seller’s property with a small (or no) down payment. Among the benefits:

  • Seller –
    • Easy sale
    • Monthly lease payments to cover the equity on the property
    • Release from responsibilities of managing the property
    • Good monthly interest income

  • Buyer –

    • Purchase without bank or lender or appraisal involvement
    • All cash flow and profits above the master lease agreement and payment
    • Buying option at a pre-fixed price (even if the property value has increased), within a specific time frame
    • Faster cash flow and equity building

  • Master lease disadvantages:

    • Foreclosure if payments and terms of lease are not fully observed
    • Seller’s mortgage company may initiate a due-on-sale clause if a Master Lease is enacted
    • Seller may not adhere to the agreement

Renting or buying

The needs of each business are unique and deciding to rent or buy a commercial property depends on a number of factors. Before you make any decisions, consider pulling together an advisory team to assist you. These are some of the factors that may influence your lease/buy decision:

  • What is your company’s financial health? A thorough financial analysis may be the most important first step in your decision-making process.
  • What are your business objectives for your business – in one year, three years, five years?
  • Leasing generally won’t require the cash outlay that an outright purchase will but there most likely will be rent escalation and certain lease risks should the owner default, declare bankruptcy, sell the property, or die.
  • Purchasing a commercial property usually requires a significant capital outlay for both the purchase and any related financial incidentals.
  • What is the expansion potential? Whether you lease or rent, what are the options and opportunities to expand your current space?
  • What is the current condition of the commercial real estate market? Real estate generally shifts between expansion, recession, or recovery phases. It is influenced by numerous factors including demand and supply, vacancy, rental rates, and investor interest.

A due diligence team

Making a major decision like this takes time, extensive research, and wise counsel. Consider the benefits of assembling a team to help you through the process.

  • Accountant -helps you assess what your business can afford, the tax, and operating budget benefits.
  • Lawyer – reviews the contracts, participates in negotiations with the seller and lender, helps complete the transaction, can track title ownership and any pending litigation or insurance claims that may affect the property.
  • Mortgage broker – helps you evaluate financial options.
  • Commercial broker – helps you identify what you can afford and properties that suit your budget.

Additional considerations

You and your due diligence team will also need to assess or identify:

  • The property’s location
  • Its physical condition (including environmental or liability issues)
  • Allowable uses
  • Interior and exterior limitations related to zoning laws or building codes
  • Parking and access
  • Expansion potential

This list is far from complete but it can help you be aware of some of the many factors related to leasing or buying a commercial property. Your team can help you assess each aspect and relieve you of the burden of pulling all this important information together on your own.

The more knowledge you assemble, the better the chances are that you will make a well-informed decision that will benefit you and your business for some time to come.