Jeff Barber has a multidimensional view of whether small-business owners should buy or lease their home base of operations, whether it be an office, store or manufacturing facility.
He has leased, owned and assisted others in the commercial financing process.
“Get your business up and running, build your business, make it stable, then look to buy a building,” said Barber, president of Lehigh Financial Group LLC.
Barber, a commercial mortgage broker who arranges financing for small businesses, is a tenant in the former Max Hess building on West Hamilton Street in Allentown. He intends to move his business into a location that he and his wife, Gina, recently bought and are renovating at 122 N. Fifth St. in downtown Allentown.
Barber and others in the commercial real estate industry say the economic climate is strong in eastern Pennsylvania, especially in the Lehigh Valley. But small businesses need to weigh their options before they dive into a lease or splurge on an office building.
There are pros and cons to both. It might be better to buy to gain equity, have flexibility to renovate and gain tax benefits. It might be better to lease to generate more cash flow, have flexibility to relocate and have no maintenance costs.
For example, a startup may do better leasing so it can save money and establish success before navigating the waters of commercial property ownership. For other small businesses, mortgage costs and property taxes are manageable while they build equity.
“I wanted to buy my building, too, but when you are a business just starting out, you do not want to be saddled by a huge mortgage payment. … It is a lot of responsibility to own a building,” Barber said.
“Leasing is good because it allows you to test the market, to figure out if this is a good spot for your business to be located.”
READY TO POUNCE
Barber said commercial real estate is in demand in the Lehigh Valley because of its convenient location to many of the largest cities on the East Coast, its amenities and the diversity of industry in the region.
He said the cost of living is lower in the Lehigh Valley than in New York and New Jersey, and real estate taxes are lower.
There are plenty of businesses in the region now leasing that are just waiting for the right property to be available to buy.
SMALL BUILDINGS ARE SCARCE
Cindy Feinberg, a principal at Feinberg Real Estate Advisors LLC in South Whitehall Township, agreed that the economy is thriving.
“In the Lehigh Valley, businesses looking for small properties are finding it hard to purchase,” as small buildings are hard to come by, Feinberg said.
“But it allows [businesses] that are stuck in a lease to have more time to save and plan for a purchase.”
She acknowledged that some businesses choose not to own because they do not want the responsibility or to have to worry about maintenance costs.
CASH FLOW IS PARAMOUNT
Mark Rentschler, a finance specialist at the Kutztown University Small Business Development Center, said there are many variables when a business owner is choosing between buying or leasing a property.
“The most important thing is cash flow,” he said. “What are the resources that a business has to start with and what do they need to get the business open?”
The center offers loan opportunities for businesses both starting out and those leaping into building ownership.
FIRST, GET ESTABLISHED
According to Rentschler, a small-business owner can expect a bank or traditional financial lender to request a down payment of 20 percent in order to back a commercial building purchase.
A federal Small Business Administration loan, though, might require as little as 10 percent.
“You have to look at what the cost of the building is, how much revamping is necessary? For a business just starting out, leasing is often more favorable,” Rentschler said.
“You want to demonstrate cash flow, get some longevity into the business, then buy a building.”
With leasing, the business is not necessarily required to have a spousal guarantee, which puts assets of both the business owner and the spouse at risk.
There are as many reasons to buy as there are to lease, and there is the possibility that a small business can work out a lease-purchase arrangement with the seller, Rentschler said.
In this scenario, the seller provides the financing until the business can get traditional bank financing. The business is leasing with the intent to buy.
“When you have ownership of property, you have the benefit of building equity,” he said. “There are tax benefits and the ability to get better loan financing.”
FLEXIBILITY WITH LEASING
Robert Mineo, financing assistance program director at Lehigh University’s Small Business Development Center in Bethlehem, sees flexibility, control and equity as factors to consider in any lease or ownership situation.
“With a lease, you are building history and momentum,” and the business owner is not tied to a mortgage, making it easier to move when he outgrows a location, Mineo said.
“But, a business that purchases property has that physical asset to build equity.”
PROTECT THE DEPOSIT
Those in commercial real estate say for a lease or sale negotiation, there should be a way out of the transaction.
“It is very important to include a contingency so that if financing falls through, the business can get their money back,” Rentschler said.
A zoning variance is equally important. If a location or property is not properly zoned, it can be costly and time-consuming to the business, he said.
ADVICE FROM THE PROS
Feinberg said that no matter the type of business or its structure, it is crucial to get an accountant and tax attorney involved in any lease or purchase agreement.
“All agreements are negotiable, so you need to make sure that you have the right advisers, right counselors involved,” Feinberg said.
“Make sure you are in a position that is the most beneficial for you and your business.”