Commercial Mortgage - Commercial Property Lease or Buy?

October 10, 2018 | Posted by:

Commercial Mortgage - Commercial Property Lease or Buy

With Winnipeg experiencing sustainable economic growth, some residents who are managing (or have completed) a residential mortgage are using their equity to start a new business, including brick and mortar operations that may equate a store, eatery, or office (etc.). For those interested in a physical space, another important decision must follow - should you lease the property or enter into a commercial mortgage?

As Winnipeg’s residential and commercial mortgage broker, I’m here to provide some insight into today’s topic so that you can make a more informed business decision.

6 Things You Need to Consider When Deciding Between a Commercial Property Lease or Mortgage in Winnipeg

Location, Location, Location

The adage is true when it comes to business success. If you have the opportunity to secure a location that is backed by favorable demographic data, consumer base growth projections, and preferable supplier routes, you might want to lock it in if the opportunity presents itself. Owning a property in a prime location can not only drive business today (for whatever it is you sell) it can become an immensely more valuable asset for your business and personal wealth alike in the decades to come. 

You Are (or Not) Committed for the Long Haul

If your “five year” business plan has you moving to another location or you’re taking a “let’s see what happens” approach to your business then a lease probably makes more sense. The last thing you want to do when not fully committed is to hunker down into a physical property that you may not even want five years (or so) down the road. Now don’t look at this consideration to not buy as a negative, as if you fully expect your business to grow rapidly, committing to a small space may hold you back.

Lease Limits

While some limits imposed upon the property are due to bylaws and zoning regulations (leaving little wiggle room for concessions) some are set by the owner/landlord. If these limits limit your ability to better service customers/clients (i.e. knocking down a wall to create more usable space, or bringing in a new installation) then your hands may be tied when it comes to doing what you need to do to grow your business. In this case, you may consider breaking the chains of a property lease and opt for a commercial mortgage which will provide you with ownership and decision making abilities that result in tangible (and profitable) action.

Leaseholder Warning Signs (i.e. No Option to Renew?)

Beyond the limits a leaseholder may impose upon you as a business owner, there is another cause for concern, one that we see result in shuttered doors/windows of once beloved mom & pop shops and boutique stores all over the city. This concern is a lack of option to renew your commercial lease. When a commercial property owner indicates that a lease renewal is not on the table and you’re eying its conclusion just one year down the road, it may be time to mitigate your risk and make plans to buy your own space so that no one ever again holds that renewal power over you. 

Other warning signs that a landlord may not be willing to accommodate your business needs in the future, or may even jump ship and sell to another party, is when they have neglected to fulfill reasonable duties to you. This may include a lack of property maintenance or refusal to carry an adequate commercial insurance policy. 

Business Disruption is Too Risky

This applies to those of you who are considering leaving a lease to move to a new space where you hope to hold a commercial mortgage. When doing so, there will be a period of business disruption. While there are steps to take to minimize losses, the cost of keeping one shop/store/office open right up until the moment you open the new (owned) space may be too great to bear. The revenue loss that can come from business disruption that occurs when moving from a leased property to an owned one must be considered. Be realistic when making that revenue loss projection, and inflate it by an additional 20% to account for unanticipated events (incomplete renovations, etc.). If you can’t sustain that loss, don’t make a move until you’re prepared to do so.

Free Up Capital to Put Back Into Business Initiatives

When paying a commercial rent/lease, there’s an opportunity cost that may be lost in the process. The money you’re spending on the rent/lease may certainly be better used to invest back into the business for profit generation and growth.

If you can score a great commercial mortgage rate with the help of your broker, you may very well have more capital left after your rent/lease has been replaced by a potentially more favorable mortgage payment. Take that leftover dough and make it work for you.

It should be noted that current business owners and budding entrepreneurs need to be mindful of rising commercial mortgage interest rates. Before you even think about opting out of your lease to buy a space, secure the services of a commercial broker that understands the Winnipeg market better that any. This will allow you better access to lenders and unadvertised rates that can contribute to your longterm ROI. Contact Ron Chan today at 204-290-9950 to learn more.

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