Comparison of Leasing vs. Owning Commercial Real Estate
If you are looking to buy a commercial building or you are just exploring that opportunity, the following could be helpful information as well as introducing you to a building that may just be what you are looking for.
MOST PEOPLE IN BUSINESS GIVEN A CHANCE WOULD RATHER OWN THEIR OWN BUILDING VS. LEASING FROM SOMEONE ELSE. SURPRISINGLY, MOST DO THIS THINKING THEY CANNOT?
No one goes into business hoping not to expand and grow if the opportunities present themselves. No one wants to lose out on an investment potential with it’s tax benefits and building up equity for themselves vs. making payments to a landlord along with the ability of controlling their own space.
If you go into business with the expectation to only be in business for only a few years, then your best bet is to lease. However: If that is not your intention and if your business has stable revenue with sufficient cash for a down payment it makes sense to purchase commercial real estate where it gives you a large asset to leverage for future business needs.
Often times a tenant when making a comparison of how their lease rent matches up to the potential mortgage payment that comparison typically only takes into account the amount of the lease base rent and when omitting the expense reimbursements is distorting what a tenant is effectively paying.When making a comparison, make sure you add back in the expense reimbursements that when added back to the base rent have surprised andshockedmany at how much per sq. ft. they are effectively paying without even realizing it.
IN ADDITION TO THE BASE RENT OFFICE AND RETAIL TENANTS PAY, THEY ALSO PAY THEIR PRO-RATA SHARE OF OPERATING EXPENSES AND COMMON AREA MAINTENANCE (CAM) EXPENSES:
The expense reimbursement numbers are an average on a national basis. If you lease or are going to lease office space, the average operating expense reimbursement is about $8.59 per sq. ft. that includes a tenant’s pro-share of the real estate taxes, building insurance and the applicable operating expenses for the building. For illustration purposes, if you are paying $14.00 sq. ft for the base rate, your effective rate would then be $22.59 per sq. ft.
If you lease or are going to lease retail space, like office space your obligations are still going to be based upon your pro-rata share percentage of the building. From this percentage it will be calculated against the real estate taxes, building/property insurance and the common area maintenance costs (CAM). The average CAM costs are about $3.88 sq. ft. that will be on top of your base rate.
Base rental rate averages for Stark County, Ohio According to CoStar the nation’s #1 commercial real estate research organization they lookedat the net effective leasing base rates for both office and retail spaces over the previous 3 year period within Stark County, Ohio (Market) where all deals were included regardless of size from the lowest to the highest that resulted in the averages.
Office Space: Average leasing cost for the past 3 years for office = $ 11.08 sq. ft. where the low was $5.00 sq. ft. and the high $28.00 sq. ft. The average lease deal = 2119 sq. ft.
Retail Space: Average leasing cost for the past 3 years for retail= $ 10.93 sq. ft. where the low was $3.33 sq. ft. and the high $21.00 sq. ft. The average lease deal 3,942 sq. ft.
Note: When you own the building you control the operating expenses. But when you lease either office or retail space you are subject to paying your pro-rata share of the total applicable operating costs that you have no control over andthat may not even be of benefit to you and/or your clients.
Effective monies paid when combining the base rental rate with the average expense reimbursement obligation:
Office Space: Average leasing cost base rate for the past 3 years for office = $ 11.08 sq. plus the average operating expense reimbursement for office space is about $8.59 per sq. ft. equaling a net effective rate of $19.67 sq. ft.
Retail Space: Average leasing cost base rate for the past 3 years for retail= $ 10.93 sq. plus the average CAM cost of about $3.88 sq. ft equaling a net effective rate of $14.81 sq. ft.
Now that you can see how much more a typical tenant effectively pays for their leased premises, apply the expense reimbursement dollar amount in your own lease agreement that may or may not be higher than the national average numbers along with any other monies required to be paid associated with your tenancy to your base rate and remember that Price Isn’t All That Matters:
A building is more than just bricks and mortar and it encumbrances more than just it’s four (4) walls when exploring it’s potential. As Internet Connectivity is taking over the existing mantra of Location, Location, Location the neighborhood once thought to just be incidental and separate from the acquisition of a building has taken on a whole new meaning. Under a typical lease arrangement it will be the landlord who decides on how their property will be seen and integrated within the community it is located in which is outside the control of a tenant.
Owning your own building gives you the opportunity to try to capitalize on the growing movement that is proving to be beneficial where developers, investors, entrepreneurs and building owners are seeking buildings in evolving and growing neighborhoods where INCLUSIVITY is replacing exclusivity and incorporating in a COMMUNITY’S HISTORY and make-up as part of the character and ambiance of the building location and the opportunities that it represents where the benefits of doing good for the COMMUNITY by creating live/work/play locations are showing impressive growth possibilities.
Are the quality of life amenities of a location considered as being an important part of the decision process of choosing one location over another? For most, the answer is yes. Research Is Everything. Maybe today you have a small size business, but tomorrow it may be a medium size business and you want to be in a position to expand when the time is right for you. Getting a building with that elbow room allows for that flexibility and in the mean time, you can rent out parts of the building to generate cash flow until you are ready.
Market rates are whatever a buyer is willing to pay. With that said, the “market” will be established based upon the cost per sq. ft. of SOLD and not FOR SALE for a given period of time and the best indicator of value is the sale records from the County Auditor.The county records of comparable type sales is what the Real Estate Brokers/agents, lenders, appraisers use as the data is from an independent 3rd party. Because the county includes building use types from all locations and sale prices, the average rate takes into account, “The Good, the Bad and the Ugly” and it is from this average rate where it is up to each seller to justify if their price is above that market rate average and it is up to each buyer to decide if it is worth it as no two properties are the same.Note: The county will assign an accessed value that may or may not match up to the cost per sq. ft. averages. Some of the reasons could include such as an office building as being vacant or partially vacant when assessed by the auditor when it was not.
Zoning:This trips up people more than you think when a property owner looks to expand the business into different directions. When looking at or considering buying a building look to see how flexible the zoning uses are. Most are use specific in that if it is zoned for office the building can only be used for office purposes and if for retail it will be specific to retail uses even specified uses. Suppose you own a building zoned for office and someone in your family always dreamed of owning a bakery one day and with the additional space you have it would be a good fit except that use would not be one of the permitted uses under the office zoning. If you do not want to be limited by the uses of your own building by yourself or subleasing to others, make sure the zoning allows for that flexibility and if it does not, maybe you need to keep looking until you find one that does.
Summary: The county averages are based upon hundreds of thousands or millions of sq. ft. of sales or leasing costs. From that starting point a building will distinguish itself from the average in terms of what it has else to offer, what the neighborhood has to offer, what the quality of life of the community has to offer, etc. Keep in mind what has changed in commercial real estate is that Internet Connectivity is taking over the mantra of location, location, location and growing neighborhoods are taking on a whole new meaning.
Now Imagine a location that is a Canal Waterfront Building in a hip and growing community with fiber optics and high speed bandwidth that is blow the market rates per sq. ft.
Canal Waterfront Building that is available for sale
High speed internet connectivity: Synchronous fiber optic internet access with many types of voice solutions which include hosted voice systems, analog POTS telephone lines, SIP Trunks as well as PRI telephone service.
Commercial waterfront buildings have been shown to have an increase in value of 35% over similar non waterfront buildings.
Your backyard is the historic Ohio & Erie Canal and the Stark County Park system that are both natural stress busters.
The community branding identity is “Ohio’s Gateway to Outdoor Recreation”.
21,120 gross sq. ft. free standing building with the exterior garden/entertainment area that can be developed for an estimated additional 12,000 sq.ft. expansion space.
Because the building is located in the historic downtown, it qualifies for Historical Tax Credits: The Ohio Historic Preservation Tax Credit provides a state tax credit up to 25% of qualified rehabilitation expenditures or QREs and the Federal program provides 20% where they can be stacked for up to 45%. In general, a dollar of tax credit reduces the amount of tax owed by one dollar with a maximum $5 million in Ohio state tax credits. EX: $100,000 spent on approved QREs x 45% = $45,000 or $1,000,000 spent on approved QREs x 45% = $450,000 in tax credits is an investors dream.
For more information, click here:https://www.nps.gov/tps/tax-incentives.htm Depending upon the type of business, this building represents the opportunity to both live and work in the building thereby allowing for you to either put up for sale your home saving that mortgage payment and applying to your commercial location or keeping it and renting it out as an investment property.
Zoning:B-1 General Retail Office District Zoning that is a versatile zoning use where in addition to office and retail uses, the building can be used for a restaurant/bar, theatrical playhouse, medical and other health services, bakery, ice-cream parlor, dance studio and school and many others including the opportunity for a hotel and a bed and breakfast inn. You can even live in the building and work out of it giving you the opportunity of living and working under the same roof where being an owner occupied building could open up additional funding options.
Subleasing: Because of the variety of different business types, it allows for greater flexibility in finding the right tenant fit for you to generate cash flow until you need that space back.
Dreams can come true: Everyone has a dream of doing something else other than what they are currently doing and here is that opportunity where you can open up that bakery shop you have always wanted or that little bistro or you have always wanted to have a dance studio, etc.
SALES COMPS: Of comparable type uses is the standard methodology used by real estate and non real estate people to represent the best indicator of value as sale comps are evidence of an arm's length transaction over a period of time.The sales comps are generated from the county records that will identify an average cost per sq. ft. for the different use types that are then used to match up as to whether a building or property is at, above or below the market comps.
Per CoStar in STARK COUNTY, OHIO Average Office Building sale price for the past 3 years = $63.70 sq. ft. Average RetailBuildingsale price for the past 3 years for retail = $87.31 sq. ft. Blended rate: $75.51 sq. ft. Subject building at full sale price: $70.31 sq. ft.
The sale price is $1,485,000 $70.31 sq. ft.
Loan: For illustration purposes using a commercial mortgage calculator, the following is what a possible loan could look like based upon the spread of two different loan rates: Sale price $1,485,000 Assuming a 20% down payment - $297,000 Loan amount - $1,188,000 If the loan was at 6.0% based on a 10 year term w/30 year amortization.The mortgage payment broken out as a leasing cost for comparison =$7,122.66P&I per month or $4.05 sq. ft. If the loan was at 8.0% based on a 10 year term w/30 year amortization. The mortgage payment broken out as a leasing cost for comparison = $8717.12 P&I per month or $4.95sq. ft.
Comparing the mortgage payment to the lease payment Office Space: Average leasing cost base rate for the past 3 years for office = $ 11.08 sq. plus the The average operating expense reimbursement for office space is about $8.59 per sq. ft. equaling a net effective rate of $19.67 sq. ft.
Retail Space: Average leasing cost base rate for the past 3 years for retail= $ 10.93 sq. plus the average CAM costs is about $3.88 sq. ft equaling a net effective rate of $14.81 sq. ft.
Subject building for sale: Real Estate Taxes = $0.23 per sq. ft. Building Insurance =$ 0.12 per sq. ft. Operating Expenses = This will depend on how you want to operate it as you now have direct control.
Now that you have seen the numbers and how commercial real estate is evolving, you will appreciate what this building has to offer from price, fiber optics, nature, quality of life amenities. While on the website you will have the opportunity to also see the community the building is located in as that will be your new neighborhood along with other current uses of the building that you may want to continue on.
For questions regarding the building, please review the following attachments that will give you a better feel for the building and the neighborhood and for all followup questions please email me at firstname.lastname@example.org