On the fence about leasing or buying commercial real estate?

If you're a business owner, is it better to lease or buy commercial real estate? On September 25, four experts explored that question at Eastlake Campus, a Burnaby complex designed for small-business users. Built by Adera Development Corp. and Sun Life Investment Management...

Credit: Erin Wild Photography

(From left) Moderator Nick Rockel with panellists Milton Wong, Susan Do, Max Zessel and Mohammed Mecklai

Four experts give their take on the best practices for prospective business owners

If you’re a business owner, is it better to lease or buy commercial real estate? On September 25, four experts explored that question at Eastlake Campus, a Burnaby complex designed for small-business users. Built by Adera Development Corp. and Sun Life Investment Management, 310,000-square foot Eastlake contains six buildings with office and flex-industrial spaces starting at 2,000 square feet.

The panellists: Susan Do, an associate with the commercial property group at the Vancouver office of law firm Singleton Urquhart Reynolds Vogel; chartered professional accountant Mohammed Mecklai, proprietor of Mecklai Tax & Accounting in Burnaby; Milton Wong, property manager with Vancouver-headquartered Adera; and Max Zessel, vice-president, commercial sales and leasing, at real estate services firm Cushman & Wakefield in Vancouver. Moderating the wide-ranging discussion was Nick Rockel, editor-in-chief of BCBusiness.

When deciding to lease or buy commercial real estate, businesses need to think about money, location, and liability and responsibility, Do said. “You’re not going to get 100-percent financing from a bank, so you do need to put some money on the table in addition to any mortgage you can get,” she explained. “And in the space that you’re entering, do you need to renovate? Do you have costs in addition to buying when you get yourself on title that you need to get it up and running?”

The next question is whether the location works for you. “What kind of business do you have?” Do asked. “If you need to be on Robson Street for your business, can you afford Robson Street? If not, then you need to lease. So you need to think about the type of business that you have and where you need to be.”

On liability and responsibility, decide if you really want to own a property, Do advised. “Do you want to do more than just run your business? Because when you own something, you need to think about maintenance of that unit.”

If you’re seeking to buy a commercial property, banks ask for internal statements and a personal guarantee, Mecklai said. With a lease, by contrast, you have a guarantee with the landlord. Determined to buy? “The banks will look at cash flow,” Mecklai noted. “These days with the new requirements, you generally need about 40 to 50 percent to put down. But there are some creative ways of financing.”

When purchasing, upfront costs can run in the hundreds of thousands of dollars, Wong observed. “With leasing, you’ve got your security deposit, which is first and last month’s rent, and maybe some legal fees to review the lease, and that amounts to a few thousand dollars,” he said. “You can take that difference and invest it in your business.”

Cushman & Wakefield advises all tenants coming to Eastlake to get a legal review of the lease. “[They’re] arguably move-in ready,” Zessel said of the campus’s smaller units, “but there may be some additional tenant improvement costs that you’ll have to incur.”

Another benefit of leasing is flexibility, Wong said. “Small-business users tend to outgrow their space in the three- to five-year range, and lease terms are in the three- to five-year range,” he explained. “So to transition from a smaller space to a bigger space is much easier, because you can just pack up and go, or sometimes you can blow a hole through the wall and expand that way. You don’t have to worry about finding a buyer for your unit.”

Zessel also highlighted leasing’s flexibility. “We’ve been able to accommodate as best we can the expansion and contraction of a lot of tenants, and that is something you will only get in leasing,” he said. “Strata units are liquid to some degree, but they’re certainly hard to get rid of if you need to.”

However, Do pointed out that tenants can’t simply abandon a lease, either. “If you need to find a new space, what are you going to do with your existing lease?” she asked. “Are you going to assign it? Are you going to sublet it? You can’t just walk away from it because you’ve outgrown the space.”

Whether leasing or buying, Wong recommended that prospective tenants visit the site and talk to tenants. “Ask them questions: How do you like doing business here? What’s the landlord like to deal with? How’s the property management?” he suggested. “When you’re speaking to a tenant unannounced, you’re going to get an unbiased opinion.”

When it comes to creating an ownership structure, Do warned against buying something in your personal name because you open yourself up to liability. “You really want to take a global view of your overall business structure and how you want to run this business going forward, and also to allow yourself to grow and add more assets,” she said. “Depending on your business, it’s never a good idea to hold more than one property in one company, because then all the assets can be at risk.”

Mecklai said he likes to set up a so-called nominee company that owns the legal title of the strata unit. “The reason we do that is if you ever sell the strata lot, you can actually avoid the property transfer tax on it because you’re not doing a land title change.”

Asked about the best approach to occupying a portion of a commercial unit you own for your operating business and renting out the rest, Mecklai drew attention to the relative tax hit. The part you operate through your business is taxed at the small-business rate of 12 percent, he said, while rental income is taxed as passive income—at a whopping 50.7 percent. “So generally, it’s nice to have property where you occupy 90 percent, because you can have that active business income taxed at 12 percent.”