Commercial lease or buying workspace in the US: the cost lines to model yourself

Commercial lease vs buying workspace: the true cost comparison for US businesses

What to take away

Build one cost model for the same workspace

Start with the actual suite. Use the same square footage, parking ratio, load factor, and build out scope for both columns. A lease quote may show base rent only. A purchase quote may show price only. Neither number is the true cost.

Illustrative example: 5,000 square feet at $25 per square foot per year gives $125,000 annual base rent. A purchase at $200 per square foot gives a $1,000,000 price. These are example inputs, not market quotes.

A 20 percent down payment is $200,000. A 10 year fixed loan at 7.0 percent on $800,000 gives a monthly principal and interest payment near $9,290, or about $111,480 per year.

That table is the skeleton. Your accountant and lender fill in rates, but the line items do not change. For net lease details and which costs pass through, see the definition of net lease.

Lease escalators often use fixed percentage increases or a CPI index. Cornell's legal definition of an escalator clause explains both methods. You can then compare the lease column against a fixed rate mortgage.

Ownership costs hide in plain sight. The ASTM article on commercial lease hidden costs applies to purchase diligence too. It lists operating expense traps that also appear in owner budgets.

Financing the owner occupied column

If you buy, the loan shape decides the first 10 years. A 10 year fixed rate loan creates a known payment. A 5 year balloon forces a refinance or sale.

SBA 7(a) real estate loans can finance up to 90 percent of value. The SBA maximum 7(a) loan is $5 million, and the maximum 504 debenture is $5.5 million.

Personal guarantees matter. A lender may require the owners to sign a guaranty, which is a separate contract from the lease. Cornell's definition of guaranty explains the basic structure. If you need the building for your business, compare your options before you sign a lease renewal.

If your business will occupy at least 51 percent of the building, SBA 504 and 7(a) loans can cut the down payment compared with a conventional commercial mortgage.

Taxes and the break even year

Tax treatment separates the columns. Lease payments are usually an operating expense. Ownership creates depreciation deductions, but also recapture on sale. Depreciation on nonresidential real property generally uses a 39 year recovery period under MACRS.

IRS Publication 946 provides the MACRS tables. Illustrative: a $1,000,000 purchase with $200,000 allocated to land leaves $800,000 depreciable. Over 39 years, straight line depreciation is about $20,513 per year.

The break even year is the year cumulative ownership cost falls below cumulative lease cost. Include equity, appreciation, rent escalation, tax savings, and exit costs. A simple cash flow comparison may show lease winning. A total cost of ownership comparison may show purchase winning after year seven or later.

With the illustrative inputs, lease cash out starts at $125,000 per year. Ownership mortgage cash out is about $111,480 per year before property tax, insurance, and maintenance. The crossover often lands in year 8 to 12 depending on exit value.

A break even calculation without exit costs is only half a model. Add sale commission, loan payoff, and tax on recapture before you call the winner.

Use a spreadsheet with one row per year. Put lease cash out in one column. Put purchase cash out, tax savings, principal paydown, and net sale proceeds in another. Then find the crossover.

Example: same 5,000 square foot workspace

Example: A business leases 5,000 square feet at a base rent. Over 10 years, the lease column includes escalations, CAM, utilities, and move out restoration. The purchase column includes a down payment, a 20 year loan, property tax, insurance, maintenance, and sale in year 10.

Using the illustrative inputs above, year 1 base rent is $125,000. A 3 percent annual escalator gives year 10 base rent near $163,000.

The exact winner depends on your inputs. But the line items force an honest comparison. If a consultant gives you a single lease versus buy number, ask for the annual cash flow and the exit assumptions.

Before you pay for a projection, learn how to judge a location consultant's numbers so you can test every assumption against public records.

What the lease side actually requires

Leasing is not just rent. It runs from a first estimate through CAM reconciliation, tax rules, renewal dates, and closeout. The site's guide to first estimate to final walk-through maps those steps. Use it to compare the lease column against the ownership column.

The lease side includes operating expenses, gross up provisions, and reconciliation. The purchase side includes reserves for roof, HVAC, and parking lot repairs. NFPA 101 life safety rules may affect occupancy, parking, and egress. That can change the usable area and cost per employee.

If 50 employees use that 5,000 square foot suite, $125,000 annual base rent is $2,500 per employee per year.

Common questions

How long should the hold be for a fair comparison?

Use the same hold for both columns. Ten years is common because it spans a typical commercial mortgage term and a full lease cycle.

What costs do people forget in the lease column?

CAM reconciliation, utilities, insurance, parking, restoration, and rent during any vacancy after move out.

What costs do people forget in the ownership column?

Closing costs, environmental reports, property tax reassessment, capital repairs, and sale commission.

Do I need a personal guarantee to buy?

Many commercial loans require one. A guaranty is a separate contract, so read it as carefully as the lease.