To lease or to purchase? What A/E/P business owners are doing today

FAYETTEVILLE, ARK. — The down economy presents many real estate options for the small business owner; but the tight A/E/P and banking climate might prove too difficult for many businesses to grasp the opportunity.

Owning real estate versus renting is a big decision right now, with low real-estate values offering a rare opportunity for businesses to purchase property at a favorable price. But a recent study by CIT Group Inc. said that only 6 percent of small business owners have purchased real estate in the past six years, while a majority of them (52 percent) have not even considered purchasing.

Many A/E/P professionals said purchasing real estate was a wise business investment. Pamela Bain, president, San Antonio-based Bain Medina Bain Inc., found sound financial value in purchasing real estate for her 56-person firm.

“We bought a building seven years ago. We got a great deal and are in triple the amount of space we had previously leased at just about the same price as rent. We also refinanced at the end of last year and shaved a nice chunk of change off our monthly payment,” she said.

Low interest rates and a buyer’s market have contributed to investment in on-premises real estate for many business owners. However, simply because the interest rates in today’s economy are at record lows does not necessarily mean A/E/P firms are picking up the phones and calling real estate agents. Rates might be low, but the percentage of equity required as down payment has risen significantly.

The CIT Group study confirmed these difficulties, reporting that only 28 percent of small business owners believe buying real estate today presents a “great or substantial opportunity.”

Jeffrey Cowen, executive vice president at Building & Earth Sciences Inc., a 165–person geotechnical firm located in Birmingham, Ala., provides a good example.

“We are currently considering a building purchase at one satellite office, and it looks like the bank will require 20 percent down,” he said. “Interest rates for commercial purchase are not as favorable as rates for personal residences. The entry cost and monthly payments generally make it more attractive for us to lease.”

Leasing has significant benefits for many A/E/P and environmental consulting firms. There are fewer maintenance hassles, the balance sheet does not show a mortgage debt, and relocating is easier in these times of fluctuating staff levels.

“We have 10 offices around the Southeast, and we have been able to renegotiate our rent lower and get upgrades like new carpet and building repairs at no additional cost over the past two years,” Cowen said.

There are several lease negotiation strategies that can earn big savings for the leasing A/E/P firm. The New York Times in a November article titled “Is Real Estate On Sale?” recommends:

1. Show your landlord you are prepared to move if you cannot negotiate a favorable lease rate.
2. A small rent reduction is easy in today’s real estate climate; push for a significantly lower lease rate and terms.
3. Beware the “blend and extend” deal where the rate lowers for a short time but rises too much in the future. Pay for a good commercial realtor to negotiate for you. He knows the market better and the landlord will know you are serious about moving if negotiations fall through.
4. Don’t be afraid to rock the boat with your landlord. Landlords earn higher-than-market rent when renters get too friendly with landlords.

Furthermore, obtaining financing is more difficult than ever lately. Banks are rejecting loan applicants with anything less than perfect credit, down payment requirements are larger, cash-on-hand is tougher to assemble for down payment, and A/E/P sales are down — so many balance sheets look poor.

The CIT Group study revealed that the Small Business Administration’s (SBA) loan programs might solve many of these obstacles. The survey included 306 non-home-based small business owners from across the United States. Twenty-three percent of small business owners surveyed said SBA loans were a good overall choice for them because there was no significant downside. Fourteen percent of respondents said their SBA loan reduced their down payment; twelve percent said it allowed them a lower monthly payment; and 15 percent said it allowed a longer repayment period.

Today’s market conditions often present opportunities that simply do not pan out, as Mike Phillips, president of Phillips Architecture, a 26-person firm based in Raleigh, N.C., described. He looked into buying property but other conditions precluded the purchase.

“We are currently leasing, but we began looking to take advantage of lower prices and buy a building,” he said. “The challenge for us is the dismal condition of the A/E industry and the uncertainty of the timing and extent of any economic improvement, which makes the flexibility of leasing more attractive. The requirement for a personal assurance on the loan makes real the additional risk beyond simply trying to keep a firm prosperous. We will be renewing existing leases for one to two years as a wait-and-see strategy.”