Should You Consider a Lease-to-Buy Plan For Your Next Office Space?

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3 options for occupying your office space

Lease-to-buy options offer more flexibility

When choosing an office location, business owners are faced with a myriad of decisions - not the least of which is whether to buy or lease the property. Potential buyers have another option: a lease-to-buy plan, which gives tenants the flexibility to decide later on if they want to buy.

"Considerations for the user of commercial property would allow tenants to occupy the building without the initial capital investment of down payments and closing costs," Lavista Associates President Tom Davenport says. "The consideration for the owner of property would be to expect income quickly to cover its investment costs and any associated and applicable debt service expenses."

According to Davenport, there are two choices associated with lease-to-buy options:

• Arrange a purchase option, in which the tenant will be able to purchase the property at either a negotiated price up front, or at a third-party term and price
• Have a purchase agreement written into the lease, with a set price and terms for the tenant.

"The advantages of this agreement for the user would allow it to, in essence, grow into the property and decide whether they want to purchase it," Davenport says. "We see this typically when it involves a younger or growing company who would prefer to use their working capital to grow their business, rather than invest in real estate."

But the bigger question, Davenport says, is whether the owner is ready to purchase a building or to simply lease. Typically, the decision is based on three criteria:

1. If the business is mature enough to accurately predict its growth needs, such as a business outgrowing its office space
2. Changes in company ownership, where a sale may be required if a business entity or partnership is dissolved
3. Changes in location, necessitated by the needs of the building's owner

"We typically suggest that if there are any questions by a potential purchaser of real estate on any of these three items, then to stick with leasing as the primary consideration," Davenport says.

And lease-to-buy has benefits for both lessees and owners. "It's desirable to the user because they want to use their equity for a different purpose," Davenport says. "The owner's desire is to typically generate income on the asset earlier than they may under a traditional sale model scenario."