Guide to Buying vs. Leasing Office Space

Determine Your Cash Outlay

Typically if you are planning to purchase an office, you can expect to make a down payment of between 10% and 25% of the purchase price, depending on the particular lender and your creditworthiness. When you lease commercial space, you won't need to put down nearly as much. With good credit, the typical cash outlay for a commercial lease is the first and last months rent ,which calculates to only about 10% to 15% of the outlay required when purchasing commercial space.

I recommend: OfficeFinder (www.officefinder.com/finance.html) offers information on commercial financing alternatives including a listing of commercial loan types with detailed descriptions, general lending criteria, and funding directories and sources. 
The OfficeFinder Wizard (www.officefinder.com/scripts/wizard.cfm) also allows you to make office space lease or purchasing requests online from their broker network in over 500 markets worldwide.

Calculate The Opportunity Costs

Opportunity costs are the benefits you could have received by taking an alternative action. Here we are referring to difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns 3% over the year. By purchasing the stock, you gave up the opportunity of another investment - perhaps a bond yielding 6%. In this example, your opportunity costs are 3% (6% - 3%).With the large outlay of cash required to purchase office space, the opportunity cost of that money needs to be taken into consideration. What return would you expect to receive on that money compared to the returns if you invested the money back into your business or into other investments?

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Evaluate Your Business Development Phase

Another major factor to consider in the office space lease vs. purchase decision is the stage of your businesses development. If your company is a startup or relatively new, leasing will probably always be your best option, due to the cash outlay requirements for purchasing. For businesses currently in a high growth phase, leasing allows more flexibility and fewer constraints to that growth. On the other hand, if your company happens to be more mature and relatively stable, purchasing office space can be the best way to meet your future office space requirements.

I recommend: OfficeFinder (www.officefinder.com/leasevsbuy.html) offers detailed information on the office space lease vs. purchase decision, including tips for leasing and purchasing office space, mortgage calculators, and links to sophisticated lease vs. buy analysis tools.
The OfficeFinder Wizard (www.officefinder.com/scripts/wizard.cfm) also allows you to make office space lease or purchasing requests online from their broker network in over 500 markets worldwide.

Examine the Tax Implications

The tax implications of the office space leasing vs. purchase decision are important to consider as well. Lease payments are usually fully tax deductible, but many the expenses of owning office space must be deducted over longer periods of time - up to 39 years. Another tax benefit to purchasing office space is that you get to take depreciation on the improvement portion of the property and can usually deduct all of your interest payments. When considering the tax implications of this decision it is always very important to consult with your attorney and tax professional about the legal and financial considerations to owning office space.

I recommend: Entrepreneur.com (www.entrepreneur.com/tax) has a business tax center offering state and federal tax forms, a glossary of business tax terms, pages of informative articles regarding business tax issues, and other valuable tools.
Here is a direct link to an article on Entrepreneur.com regarding the office space lease vs. purchase decision: http://www.entrepreneur.com/money/moneymanagement/article173312.html

Perform a Comprehensive Cash Flow Analysis

In order to really understand the financial considerations of purchasing office space, you need to prepare a detailed comparative net present value cash flow analysis. This takes into account your predictions on the future including the holding period of the property, anticipated appreciation vs. rental increases, interest rates, and cost of expenses increases. To obtain the most reliable result possible, it's is a good idea to perform three separate calculations - optimistic, realistic and pessimistic. There are tools available to help you perform a comparative net present value cash flow analysis yourself, however this is a complicated process, so consider engaging the services of an financial advisor to perform these calculations.

I recommend: Information from Microsoft on calculating NPV using Microsoft Excel: http://office.microsoft.com/en-us/excel/HA011136321033.aspx

Free calculators and analysis tools including Cash Flow,  Capital Budgeting , and NPV:
http://www.exinfm.com/free_spreadsheets.html

Investopedia offers this free Net Present Value calculator: http://www.investopedia.com/calculator/NetPresentValue.aspx