Every business needs a place to call home. Whether to buy or lease is a question that every business owner faces at least once and hopefully several times, during the life of the business. Even in good economic times, this is a hard question to answer with certainty, but in today's economy, it is more pressing and critical to the success of a business.

Businesses wrestle with this issue because the answer depends on so many factors: the life cycle of the business, outside economic forces, the type of management style of the business. Here are some of the more important factors that should be considered in a business' decision to lease or buy:

Leasing:

Flexibility: Perhaps one of the most significant factors in favour of leasing is the flexibility it can afford a business. Businesses that are unable to accurately predict their short and long term growth potential often find that leasing provides them with the ability to adapt quickly to downsizing or growth opportunities. Provided the market exists, businesses can lease space on a short term basis, while incorporating growth opportunities into the terms of the lease (by including an option to renew for further terms or the right of first refusal on additional space). This type of flexibility reduces the risk that the premises or building may not ultimately be suitable for the tenant's business in terms of location, size, services or quality of the building.

Cash Flow: Given the credit crunch that we all hear about on a daily basis, purchasing a property may not be a possibility right now for businesses which have either limited cash flow or a poor credit rating. The up-front costs of leasing are usually significantly lower than those of buying. If leasehold improvements and tenant fit-ups are not required, the up-front cash outlay of a lease can be as small as a security deposit and first and last months' rent. This is a significant advantage for businesses that require capital liquidity for future business investment or young businesses who have limited financial resources and little ability to obtain a mortgage. Leasing also allows conservation of cash for inventory and equipment needed to support growth.

Tax Advantages: Businesses who lease will see an immediate tax advantage as their rent is deductible as a business expense. Further, leasing more effectively matches costs and revenues for financial statement purposes.

Operational Control: The flip side of the flexibility advantage discussed above is the limited control a commercial tenant has over its leased premises. Most tenants have no control over the common areas and facilities surrounding the premises. These areas may undergo significant construction disrupting business or may become dilapidated, with little to no recourse available to the tenant. Further, the tenant will have to seek the consent of the landlord to install leasehold improvements in its premises and may incur significant administrative fees from the landlord to obtain this approval. The tenant will have to obey the rules and regulations of the landlord regarding matters such as the use of loading areas, elevators, window coverings, the type of business conducted in the premises, the appearance and location of signage, and hours of operation.

Costs: Flexibility does come with a cost. In addition to a built-in profit margin to the landlord, most tenants pay monthly administration and/or management fees as part of the rent. Further, tenants will face periodic administrative charges throughout the term of the lease related to the cost of obtaining consents from the landlord, additional service costs and supervision fees.

Ownership:

Equity: In an area where land values continue to appreciate, property ownership may give the business an opportunity to build equity, thereby increasing a business' net worth over the long term. A business owner can draw upon this equity for future financing opportunities to grow its business. On the downside, property owners will also bear the risk of declining property values. In a declining market, the property may be difficult to resell and as such restrict the liquidity available to the owners in tough times.

Costs: The costs of buying a property are inevitably higher then renting premises. One must account for the down payment, financing costs, legal fees and disbursements and land transfer tax when analyzing the financial consequences of property ownership. This is a significant up-front drain on a business' cash flow. However, predictable fixed payments over the life of a loan can be advantageous to many businesses. Property owners are not at the mercy of fluctuating lease market conditions and the business uncertainty that always arises as the lease term draws to an end.

Tax Benefits: The tax benefits of property ownership are not as immediate as those created in a leasing arrangement, but in the long term they can be more advantageous. A property owner may deduct annually depreciation on the capital assets which form part of the property. In addition, any increase in the value of the building from the purchase price to the sale price will often be a capital gain to the owner, taxed at relatively low rates. It should be noted that any amount that is claimed as depreciation is subject to recapture and will be taxed as income when the property is sold.

Operational Control: Ownership provides a business with the ability to steer its own course in respect of the look and feel of the property. Construction will be undertaken at the convenience and budget of the business and operational rules will be tailored to maximize value while limiting the disruption to the business.

Limited Mobility: If the building turns out to be unsuitable for the business, it may be difficult to resell or rent out the premises to a third party. In such circumstances, a property owner may be forced to stay in the unsuitable accommodations or undertake the needless cost of maintaining two premises at the same time. The costs of moving in these circumstances are always higher than a lease arrangement, as the property owner is responsible for the real estate brokerage fees in both a resale and leasing situation.

Third Party Leasing Opportunities: If space permits, a property owner can recover some operational costs and perhaps make a profit by leasing out unused space in the building. This has both an upside and a downside. While the financial benefits of renting space to third parties are obvious, one must also consider the strain that managing a building may place on a business, particularly for an inexperienced property manager. A property owner must either incur the cost of hiring a management company to run the premises or undertake this task internally.

Maintenance and Compliance Obligations: Property ownership is accompanied by a laundry list of maintenance and compliance obligations. In addition to ensuring that the day to day maintenance of the building is undertaken, one must also ensure that the building is in compliance with various government regulations: elevator permits, waste disposal, energy conservation and environmental protection, to name a few. Significant repairs or replacements to structural elements of the building may be a large and unexpected drain on the cash flow of a business and may negatively impact the value of the building if repairs are not undertaken.

In respect of the lease or buy question, businesses are not unlike people. In their early years, people normally rent when their future course is uncertain and their financial situation is shaky. However, as they mature and settle into their careers, their financial stability grows and home ownership becomes a viable alternative. Similarly, leasing is more suited to those businesses that are in a constant state of flux and need the ability to make rapid adjustments to their office needs. Property ownership on the other hand tends to attract mature businesses which are content to stay in a fixed location for a number of years and which have the cash flow available to invest in long term equity growth opportunities. Overall, the right answer depends on the business asking the question. The best advice a business owner can follow is to seek out assistance from professionals who specialize in real estate/leasing issues, including a lawyer, a real estate broker and an accountant.

Terilynn Anderson is the head of the Real Estate Group at LaBarge Weinstein Professional Corporation. E-mail her at ta@lwlaw.com or visit www.lwlaw.com

To read more Business Matters articles from LaBarge Weinstein, click on: http://www.ottawabusinessjournal.com/businessmatters3.php