WHAT YOU SHOULD KNOW BEFORE LEASING
Many businesses operate out of commercial spaces, whether they be storefronts, factories, or offices. If you are launching a new business or expanding one you’ll have to decide whether you want to lease a building or own it. Here are some of the advantages and disadvantages of leasing that you should know before you make this important decision.
Advantages to Leasing:
Flexibility to Expand and Contract
This is great for a company that anticipates either growth or downsizing.
Flexibility for Financing
Usually, most lease agreements have fewer restrictions compared to loan agreements. Also, leasing is well suited to piecemeal financing.
Ability to Depreciate Land
Lease payments reflect the lessor’s investment in any building as well as the cost of land. Because of this, the lessee in effect may be able to depreciate the land by deducting the full amount of the lease payment for tax purposes.
Leasing Tends to Make Expenses Easier to Handle for the Lessee, as well
The payments are a constant annual outlay, and when assets are leased instead of owned, the earnings tend to seem more stable.
100% financing is said to be provided with leasing, while a down payment is usually required with borrowing
The 100% financing is diminished by the first required lease payment amount since the payments are normally made in advance of each period.
Disadvantages to leasing
Leasing is generally the more expensive option for a company with strong earnings, great access to credit, and the ability to gain tax benefits from ownership. HOWEVER, for smaller firms and individuals desiring to take on space, they might find that borrowing terms and leasing are approximately the same.
Loss of Salvage Value for the Asset
Meaning the value lost at the end of the property’s lease term. Beware of this being a substantial loss. Also, of course, the lessee may not cancel a lease without consequence if the property turns obsolete or the project becomes uneconomical.
Difficult to get Approval for Improvements
It can be difficult to get approval for property improvements on leased real estate, especially if the improvement is unusual or only specific to the current tenant