Retailers: Leasing versus Buying

It makes sense that many businesses looking for a new location are drawn to areas where similar businesses exist. Retailers can have difficulty drawing customers into their business if they are too far out of a downtown area or commercial corridor. They will often wish to locate in areas where there are other retailers so that they can be convenient to shoppers visiting the area. One can find a similar trend with office buildings. Of course, there is the convenience factor as similar businesses draw similar crowds and need similar amenities. Another factor is that municipalities zone properties to keep similar uses with each other as a way of organizing the city, buffering uses like residential and industrial manufacturing from each other, as well as maintaining efficient traffic flow. However, such specialized areas tend to be those where land is expensive and vacancy is low.

When considering whether to purchase or lease commercial real estate, it is often more affordable in the short run for a new retailer to lease property. Although there are exceptions, generally only the most recognized big box retailers or very specialized retailers are able to go far from the retail areas and succeed. Thus, finding a well-traveled, popular shopping district is important. But land in such areas can easily exceed many new retailers’ budgets before the costs of site and building plans are even contemplated.

Some retailers will find that purchasing a property makes the most sense for their situations. In secondary markets, where vacant properties are available, land values are low, and other retail areas are inconvenient, it could be an excellent decision. This is especially true if the store will offer something otherwise not available in town or if there are other factors that make such a move an obvious choice (the space was recently vacated because of retirement of the prior business owner and is in a turnkey state). And sometimes, retailers in larger communities may find an incredible bargain in an incredible location so it is often worthwhile to evaluate such a situation, although sometimes a bargain is not what it seems.*

Leasing a property can make sense when the landlord has already built, or will build the building (often called build-to-suit) for the tenants. If the building already exists, a tenant can usually move quickly and get opened at the site without much delay. If property is being bought or a new building is being erected, there will be more of a delay, but the tenant can set forth specific requirements for the new location. The landlord will undertake the first hurdle of getting the land under its control, dealing with any environmental or title issues, and financing of the project. In such cases, there can be significant value for a tenant when a landlord invests capital in a facility from which it can operate its business as the investment required can be substantial. Then, subject to terms of the lease, the landlord will often be the one to jump through the remaining hurdles of developing a site plan and building plans, getting the plans reviewed and approved, seeking any land use variances required, utility hookups, hiring contractors, and managing the project. This type of activity benefits from specialized knowledge and is time consuming. As a business owner, it can make sense to save the business funds for operations rather than erecting a building; furthermore, one might prefer to leave extensive construction planning and management activities up to another party so as to concentrate on the tenant’s core business.

These are but a few items to consider as you weigh the benefits of leasing or purchasing your new retail space.

*Buyers should be aware that sometimes properties seem like a great deal, but there can be reasons for such “deals”. Such properties may have major issues including, but not limited to, title issues restricting building design, site access or allowed uses, inadequate parking, or environmental contamination requiring remediation.