Buying vs. leasing as businesses grow for entrepreneurs

Date: May 21, 2015

Name: Buying vs. leasing as your business grows

Presenter: Todd Bohn

When businesses are growing, many entrepreneurs will face the decision of buying or leasing commercial space. Moreover, there are many factors that influence the decision. Studiothink invites Todd Bohn, the Vice President of Commercial and Industrial Sales and Leasing at Frontline Real Estate Services, to discuss the variables they need to consider making buy or lease decision for their businesses. Todd Bohn will share his experience to help entrepreneurs to make strategic real estate decisions.

Todd Bohn believes for commercial real estate, entrepreneurs have three kinds of options: lease, purchase strata or purchase land. Some entrepreneurs cannot choose the right options for their businesses. Bohn will explain the top 5 mistakes business owners will make in buying or leasing decision.

Mistake #1: Decide they no longer want to pay rent

Lease can be flexible and has the option to change, but in the long run, lease options can be expensive for some businesses. Decision not to pay rent is not the primary decision to switch option. Bohn wants entrepreneurs to analyze their business direction and understand if lease is the best option that fits the business growth.

Mistake #2: Assume real estate will immediately increase in value

Bohn stats the overall real estate market has the average of 7% annual increase. However, the increase is not constant. Bohn believes entrepreneurs should not anticipate short term view; instead, they should look for long term investment. Entrepreneurs need to evaluate the current cycle, the timing, and the buyers in the market.

Mistake #3: Do not spend enough time evaluating staff and customer needs

Bohn suggests entrepreneurs to analyze the proximity, parking, the flow from people, driving time, commercial remedies and the quality of the building. As for parking, the average space is needed is 200 to 250 square feet per staff. Bohn indicates there are limited project for strata near Sky train station.

“Know where you are and where you are going”

Mistake #4: Do not spend enough time evaluating financial goals

Entrepreneurs need to analyze their business long term direction. They need to figure out their expected return and other financial goals. Bohn emphasizes the average up front cost for strata are at least $5,000. Therefore, entrepreneurs need to look at their cash flow and understand their timeline. As for leasing, the average is $25 to $30 square feet and it has less commitment. As for buying, it requires large amount of cash and commitment.

Bohn illustrate the difference between buy or lease in the table stated below.

Mistake #5: Uneducated on market conditions

Bohn believes knowledge is power. 90% of information is stated on MLS, 30-40% will be on CLS and 60% will need to be research on their own. Entrepreneurs need to educate themselves the overall market, understand where the new constructions are planned, and where are the pre-sales. Bohn wants entrepreneurs to step back and understand the big picture before making any commercial estate decision.

Bohn recommends 3 decisive steps for entrepreneurs.

Step #1: Start with the 5 questions.

Entrepreneurs need to figure the answer of these 5 questions.

1. Where is the business at in 5, 10, and 20 years?
2. What are the financial goals?
3. Where should the cash spend?
4. What are the customers’ needs?
5. What are the employee’s needs?

Step #2: Identify the ideal location

Entrepreneurs need to analyze the exposure, square footage, zoning, accessibility, drivability, transit and amenities.

Step #3: Get educated on market conditions

Entrepreneurs need to analyze what is favorable and unfavorable in the current market today. Understand the trend and figure out if it is permissible for business to take advantage of the trend.

Bohn shares some additional information on market. As for office leasing, it is considered to be tenant market. RFP process will be on behalf of tenant. There are limited new construction and new projects for landlord. Based on the stats, there is high vacancy in Surrey and Langley. Developers are competitive for strong tenants.

As for office sale market, strata are still to be the viable option. There is limited number of qualified buyers and the cost of improving the space is not recovered or resale. Limited new construction is planned and the developers are waiting for key buyers to kick off a project. Moreover, the lease rate is over 5 years with monthly payment.

AS for developing land, the average price is 1.35 to 1.5 million dollars per acre. It is difficult to find land and those usually for long term purpose.