Is your nonprofit currently leasing your facility? And have you wondered if you should buy property instead of renewing the lease when it expires? Or, perhaps, your landlord has just informed you that the building will be sold — and renewing your lease isn’t an option.
Whatever your reason for making the buy-or-lease decision, the process itself can be tough, with many factors to consider. Here are some pros and cons for both alternatives.
The “up” side of buying
Owning a facility typically gives you more control of your work space than leasing can provide. It allows you to build equity, and can stabilize your cash flow and presence in the community.
Essential to some nonprofits is the ability to accommodate special needs, configuring and equipping the space to their specifications. For example, a physical therapy center might not consider the option of leasing a facility because it would need to construct a swimming pool, locker rooms and other accoutrements.
The “down” side of ownership
Ownership carries risks. Some nonprofits take on more than they can chew when purchasing property — they fail to project negative scenarios such as a funding drop or local government assessments. And almost everyone today knows the risk of plummeting resale values. If you bought, what would happen if the neighborhood surrounding your building changed and it was no longer near your client base?
Additionally, don’t forget operational responsibilities, such as overseeing repairs and maintenance. Will these duties detract from time spent fulfilling your mission?
The pluses of leasing
Some argue that leasing office space or a facility has more flexibility than ownership. Say you’re uncertain about your client base and your organization could experience substantial growth or decline that requires a different space. It’s far easier to move when your lease expires than to sell real estate.
Perhaps you can secure an attractive long-term lease, one that guarantees only modest rent increases, and allows (and sometimes finances) reconfiguring the space to meet your needs. Another lease plus: Most repair headaches — and expenses — will be your landlord’s.
Leasing has its minuses
Nonprofits generally have finite financial resources. Monthly rent can take a big bite from your budget with little return, and the cost can increase dramatically when it’s time to renew your lease. Fire insurance and real estate taxes also can be the renter’s responsibility if you have what’s called “a triple net lease.”
Rental costs (assuming they’re higher and less stable than potential mortgage payments) can erode funds you’d rather use to sustain and improve programs, or invest.
Which way to go?
If your nonprofit has access to the necessary capital and stable funding, an excellent track record in planning and a firm grip on budgeting, you might want to consider purchasing your office space or facility. But if your organization lacks these basics, leasing may be the better option for now. Often it comes down to a comparison of costs.
Sidebar: Cost analysis can help sway facility space decision
Sometimes it’s difficult to decide whether to lease or buy the space you need for operations. There may seem to be an equal number of reasons to take either route. In such cases, cost analysis can help you make an informed decision.
To compare the two scenarios, you’ll have to know or estimate certain costs. On the buying side, this information includes the purchase price and financing terms, such as interest rates and closing costs of the new facility; its expected useful life for your operation; and its estimated value when you expect to sell it.
On the leasing side, gather information on the projected lease term, rate and renewal options available. Also estimate how much interest could accrue on the capital you would spend on a down payment, if you invested that money.