With property values consistently trending upward, many Florida business owners are deciding whether to purchase or lease commercial real property. Below are a few considerations to keep in mind before making your decision.
Cost of Borrowed Funds
While there has been a stream of positive news about the general health of the economy, the Federal Reserve has kept interest rates considerably low. Therefore, it is an attractive interest rate environment for commercial borrowers who are financing real property. Depending on the term of the loan and type of property, current rates range from 3.50% to 6.50%, while prime rate (a barometer for different types of interest rates and the rate which financial institutions lend to their most prominent and creditworthy customers) remains at 3.25%. To put this into perspective, prime rate was 8.25% in 2007. Lower interest rates obviously lower the monthly payment obligation, and can accommodate a move to a higher tier property.
Judged against lease terms, the comparison changes depending on whether the owner is leasing for use as retail or office space. The former is generally based on a percentage of gross sales generated at the site, the latter normally contains an “escalation clause” that annually increases the rent obligation by 2-3%. Additionally, a commercial tenant (particularly a retail tenant) is likely liable for the real property taxes, utilities, and other expenses, which negates some of the perceived advantage that leasing may have over ownership.
Thus, a lease payment may initially have a lower payment burden but over time could exceed the payment obligation of a loan.