New York metro-area office tenants with strong balance sheets have more options than ever when it comes to leaving the lease behind and become their own landlord.
Although the office “condo craze” has proven extremely popular among small businesses in markets with relatively inexpensive land prices, such as the Phoenix and Atlanta metro areas, in New York City, it’s still considered something of a novelty. While small businesses in this area opt to lease space, write off their rental expenses at tax time, and invest capital back into their business or elsewhere, there are many benefits to owning your business space. Below is a look at some of the benefits and pitfalls of owning commercial real estate.
Benefits of Ownership
In New York and the surrounding suburbs, many office condo buyers cite real estate value appreciation as a prime reason for buying instead of renting; but the tax benefits to owning can be significant. Many buyers purchase commercial real estate through a limited liability corporation and then rent the space back to their business. While the rental income from the business will likely offset many of the costs of owning the property, the business owner (via her real estate company) can also write off the depreciation of the property. Of course, owning real estate could be a good way for a business owner to diversify her assets.
Beyond that, office condo owners gain the freedom to rent out part of the space without dealing with landlords’ sublease restrictions. They can invest in lavish interiors without fear that they will be evicted from the space on the expiration of a lease.
Beware of the Pitfalls
Of course, there are downsides associated with purchasing commercial real estate now. Companies may be uncertain about their near term financial health and are reluctant to tie up capital in bricks and mortar, especially at a time when office rents are expected to level off or even decline.
Another consideration is your business’s potential to grow. If your business outgrows your purchased space, you might end up becoming a landlord to someone else and can find yourself in the real estate business.
The majority of office condominiums in the New York area are conversions of existing buildings instead of new construction. The caution “buyer beware” applies, as construction may have been done in slipshod fashion by condo-converters short on experience and capital. However, some of these conversions incorporate quality construction and all the essential elements, from new mechanical systems to technology connectivity.
The decision between buying or renting office space comes down to the situation facing each individual company. Renting makes a great deal more sense for companies on a limited budget with little disposable income or needing to invest in the business. For well-established businesses with disposable income, real estate can be a solid investment.