Docs, are you thinking about your next office space?  Should you rent or buy? The answer may not be so straightforward.  Having just recently gone through the process for our Park Ave. headquarters, I am here to share our experience.

The idea of owning your next office is certainly enticing – one we explored rigorously.  The value of commercial real estate is down.  Locking in a price today, when the values of some commercial real estate spaces are down 50%+, is like buying residential real estate at the bottom of the Great Financial Crisis.  The idea of owning a space for the foreseeable future and avoiding the never-ending cycle of leasing is an important question to evaluate.

With the purchase of an office condo, you lock in your costs, create stability in location for your customer base, and pick up some tax deductions along the way.  At some point, you may even have little to no cost once you have paid off any debt obligations associated with your commercial space. On the other hand, purchasing an office condo does have some challenges you should consider.

Asset Rich but Cash Poor

To start with, you should consider the cost of acquisition – downpayment, interest, and other fees in the cost to purchase.  Additionally, you are locking up your financial resources.  Think of your decision as a part of your overall business, and not in a silo. Does the building require retrofitting for additional structural, electrical, plumbing, etc.?  If you need to sink additional up-front cost to create the optimal practice office, will you have sufficient leftover capital to invest in people, technology, new service offerings, etc.?

Also, as you consider the long game, what will happen to the property when you retire?  Owning real estate can provide diversification benefits and rental income for many years after your retirement, but will there be demand for the building or just the practice?  If another practice doesn’t want to use the space and you intend to lease the building, you’ll need to sink additional capital into converting to a more desirable design/layout for renters.

Expect the Unexpected

When owning an asset, like commercial real estate space, you become the property manager – dealing with emergency repairs, regular maintenance/cleaning, keeping up with building codes, etc.  Part of a condo building? Welcome to the world of condo association “stuff” – board politics, special assessments, renovations, other tenants, etc.  Owning your own building also brings with it added property tax and insurance costs to consider.

Keeping Your Options Open

With leasing, you are generally able to get into more premium spaces for your business.  For example, at Altfest, we are located on Park Ave. & 57^th Street in New York – a premium location.  In the office condo market, spaces like this don’t typically exist, and if they do, it is at a completely different price point.  Location is often times commensurate with branding, so think about the impact that location has on your overall business.

The flexibility that comes with owning commercial space is great, but it also creates inflexibility like if you expand too quickly and run out of space, or if you end up with too much space.  It’s hard to project out 10 years, let alone 15 to 20 years and beyond.  Many of these flexibility options can be negotiated into a lease with your landlord, like the option to take more space, buy out of your lease at a certain point, or exclusivity clauses to block other practices from opening in the same building.  These are things that owning commercial space doesn’t allow for so easily.

Managing your expenses is an important consideration for business owners, who often times bear all the risks in running the business.  Leasing creates certainty when it comes to expenses – one less thing to worry about, for one of the biggest line items in your P&L.  While there is no one-size-fits-all solution when it comes to leasing v. buying commercial real estate, one thing for certain is there are many considerations.    It’s important to keep in mind both the financial component, but also the practical component of such a decision.

In the end, after weighing the specific factors affecting our business and employees, we opted to negotiate a lease extension with the property owner and remain in the location that has become synonymous with our firm for many of our clients.

Have a Plan

At Altfest, we desire to understand who you are and what matters to you from the start. We want to learn about your concerns or any special circumstances that will affect your retirement planning. Then we’ll put together a road map to help you get to where you want to go.

If you have questions about how buying or leasing a medical practice might fit into your own financial plan, book some time with one of our experts for a complimentary consultation.

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.