Summary of presentation from Andrew Vanchiere at the 2025 PMI Conference
Deciding whether to lease or own your commercial real estate is one of the most significant financial decisions a practice owner can make. The process involves not only thorough financial analysis but also an understanding of market dynamics, your long-term business objectives, and various technical concepts like opportunity cost and net present value. This article summarizes a comprehensive presentation by a seasoned commercial real estate agent, providing an overview of the factors you should consider—and equipping you with practical insights for your own decision-making process.
First, it’s critical to recognize that commercial real estate is fundamentally different from residential, both in transaction complexity and investment analysis. Unlike residential real estate, which is often driven by personal use and emotion, commercial real estate decisions hinge on analytical problem-solving. You may be an owner-occupier considering the pros and cons of direct ownership, or an investor looking at passive opportunities. Understanding specialized concepts like Internal Rate of Return (IRR), Net Present Value (NPV), and the “sales point of indifference”—where leasing and owning provide comparable after-tax benefits—tends to drive more rational, lucrative decisions.
Second, the importance of local expertise can’t be overstated. Real estate is inherently local—laws, taxes, permitting processes, and even market demand can vary dramatically from city to city. It’s crucial to work with an advisor or partner who has deep ties to your specific market. Moreover, don’t make real estate or tax decisions without consulting qualified professionals like CPAs, attorneys, or experienced commercial real estate brokers. Additionally, owners of multi-tenant properties should consider professional property management to avoid potential headaches.
Third, when evaluating lease versus own, both financial and non-financial factors come into play. Leasing typically offers greater flexibility, fewer responsibilities, easier scalability, and often, less risk. However, you give up control and the potential for equity appreciation and may face rising costs or limited ability to tailor the property to your needs. Ownership, on the other hand, provides greater control, potential for long-term wealth accumulation, and tax benefits (such as depreciation and, in some cases, accelerated depreciation via cost segregation). The drawbacks are greater responsibility for maintenance, higher cash requirements up front, and less flexibility if your space needs change or local demographics shift.
Finally, the decision is nuanced and should be tailored to your practice's unique situation. Factors to weigh include your practice’s growth trajectory, community trends, your desire and ability to manage property, and your financial position—including opportunity cost. For example, real estate may be a vehicle to attract partners or even pass wealth to the next generation. But leasing may make sense in areas prone to rapid demographic shifts or uncertain market forces. Technical tools such as t-bar models and discounted cash flow analyses help clarify the financial impact of both choices, but the advice of a true local expert remains indispensable.
**5 Practical Takeaways:**
1. **Work With Local Experts:** Always engage a commercial real estate advisor, CPA, and (if needed) attorney with deep local knowledge before making decisions—real estate is hyper-local, and rules differ by market.
2. **Understand Your Opportunity Cost:** Know the rate of return you could earn by deploying your capital elsewhere, and use this as a benchmark when analyzing buy vs. lease.
3. **Regularly Assess Asset Value:** If you own property, periodically obtain a broker’s opinion of value or an appraisal, as market shifts (like changes in interest rates) can significantly affect your equity and planning.
4. **Leverage Professional Analysis:** Ask your advisor to prepare financial models comparing after-tax net present value and internal rate of return for lease and own scenarios—don’t attempt to “wing it” on instincts alone.
5. **Structure Deals for Future Flexibility:** Consider negotiation points such as assignment or subleasing clauses in leases, right of first refusal for buyers, and cost segregation studies for owners seeking accelerated depreciation.
In summary, the lease vs. own decision is multi-faceted and unique to each practice. Armed with the right team and proper analysis, you’ll be better positioned to make a choice that serves both your business and personal financial goals for years to come.