Unfortunately, there’s no simple answer to this. It’s a relatively complex question and the right answer for any situation can only be determined through a proper and in-depth analysis. My recommendation is that you team with a real estate professional capable of adequately performing such an analysis and delivering the results in a clear and easy to interpret format, rather than handing you a series of spreadsheets packed with indecipherable data.
Having said that, there are a few advantages and disadvantages to leasing or buying industrial real estate here in northern Nevada. Working from the belieft that knowledge is power, a general understanding of these should be helpful as a starting point.
Advantages of Leasing:
- It keeps your cash in your business, rather than spending it to obtain a facility.
- It reserves your company debt availability rather than utilizing it for real estate.
- Lease payments are fully tax deductible.
- It’s an available source of financing insomuch as you acquire a real asset for a marginal upfront cost.
- There is a fixed cost stability and predictability due to the lease term agreement.
- There is ease of expansion or contraction within the facility or into a new one.
- There may be a choice of location not available with a for sale property.
- You can focus your resources and attention on your business, not on your real estate.
Disadvantages of Leasing:
- If a firm has good earnings, good financing availability and the ability to benefit from tax advantages, leasing is likely more expensive than ownership.
- The loss of your assets salvage value when the lease is up.
- The obligation of a lease term commitment may be long.
- The potential for loss of property appreciation over time.
- A lack of control over other tenants.
- A lack of control over the operation of the facility.
Advantages of Owning:
- You’ll enjoy tax savings from depreciation and mortgage interest.
- The potential for asset appreciation.
- You can earn income from tenants if property is leased.
- You have full control of the asset.
Disadvantages of Owning:
- The potential burden of an initial cash outlay.
- Financing can be challenging.
- The negative balance sheet impact of mortgages and trust deeds.
- There are costs to comply with changes to zoning requirements or new regulations/laws.
- There are risks of asset obsolescence and market value fluctuations.
- There is potential liability from health or safety issues.
- There can be potential inflexibility from lack of expansion or contraction abilities.
These are but the ‘intangible’ aspects of the buying or leasing in the northern Nevada market. Once these are understood, there are clear-cut, well-defined financial comparison techniques that are then performed to further assist one’s decision. All analysis must be performed in after-tax dollars for a real understanding of the best financial decision. Today’s value of the after-tax cash flow for both options is compared with a user’s after-tax opportunity cost to drill down to the best financial decision.
The next step is comparing the relative capital investments for each option to the user’s after-tax discount rate/opportunity cost, which is then further refined in a sensitivity analysis to achieve a yield that can be compared to the user’s opportunity cost. This will indicate if the capital investment is better suited to buying real estate or to investing in the company’s core business.
The factors listed here make it easy to see why partnering with an industrial real estate professional capable of performing the necessary tasks is critical. Only then will you have the proper tools to make a truly informed decision.