Exploring best option for your business: buy, build or lease?

Kelly Walsh

Southwest Washington is booming: job growth doubled the national average over the past 12 months; construction spending increased almost 10 percent from 2013 to 2014; and Ridgefield is the fastest growing city in the state. Many local businesses enjoying this upswing have found themselves flush with cash and pondering whether to buy, build or lease their next office space. Collectively, we have had numerous friends, colleagues and clients seek our input on buying or building. Consider the following and buy, build or lease your next office space with confidence.

Fair warning: we are going to recommend several times throughout this article that you hire a competent attorney. Your attorney and accountant should be the first members of your team when you begin this process. No matter which direction you choose, you will encounter well-intentioned professionals (and maybe some not so well-intentioned) with vested interests in your decision. Your attorney and accountant can give you unbiased advice to help you understand the landscape before you engage other professionals.

Buy

If you are fortunate enough to have the ability to buy property, you are in position to build long-term wealth in an investment that you can also use today and protect from the volatility of your primary business. Set up a new single purpose entity to own the property and lease it to your primary business. Your primary business pays its lease payments and deducts the expenses, while your single purpose entity collects payment, pays the mortgage and builds equity in the property.

Setting up your building ownership as a single purpose entity allows you to protect the property from creditors of your primary business. To do this, you must observe the principals of corporate separateness and keep your single purpose entity legally and financially separate from your primary business. If done right and your primary business suffers a major loss or even bankruptcy, the creditors of your primary business will not be able to get to your property. There are many nuances here, so please consult an attorney.

Setting up a new business entity is not the only way that buying your next property is like starting a new business. You also have the opportunity to lease property to other tenants, creating a new revenue stream. However, you must be prepared to be in the business of being a landlord. It will create new job responsibilities for someone. You need to anticipate and plan for the time and cost of drafting and negotiating leases, collecting rent and ultimately enforcing leases. Hire a competent attorney to prepare and review your documents.

Build

Building is like buying on steroids: It has all the benefits and pitfalls of buying with one added element: You get to design and build the building. This prospect can be both a pro and a con. If you have ever built a house, you know that it is often an all-consuming process that will take time away from your bread-and-butter business. Additionally, new construction is almost always more expensive than acquiring and rehabbing an existing building. However, on the upside, the possibilities for designing a space that is optimized for your business are endless. This can be an exciting and fun process, provided you understand and plan for the time and cost required getting your project off the ground.

It will almost always take at least two years from the day you decide to build to the day you move in, even if you are extremely organized. You have to find the right property, select and hire an architect, design the building, vet the financial feasibility of the design, obtain permits, select and hire a builder, and build it – all while generating reams of legal documents. Hire a competent attorney.

When selecting an attorney, make sure they focus on development and construction. You do not want an attorney that dabbles in this field, as you will need solid contracts with your architect and contractor. Your attorney should have access to templates produced by the American Institute of Architects or the Associated General Contractors that are well-vetted, but those contracts typically require customization by an experienced professional. Be cautious if your attorney wants to draft your agreements and general conditions from whole cloth. In our experience, not working from a well vetted template in this field is a bad idea.

Lease

Location, location, location! If your business is location-driven, you may have no option but to lease. If a retail storefront in an urban setting drives your business, you are likely best off to lease and leave the development of mixed-use buildings to the pros.

Even if location is not an issue to you, leasing may make the most sense for your business. For example, in construction your bonding capacity is often critical to your ability to grow and take on new work. Underwriters may reduce your bonding capacity if you reduce your working capital by investing it into a building. Likewise, in any industry, having a sizable loan on a building will likely affect your ability to get or retain a line of credit. You also may miss or have to pass up opportunities for your primary business because your money and time is tied up in your building.

Leasing is a simple option. You do not have the worries of being a landlord, you can avoid much if not all of the legal, design and construction expenses associated with ownership, and you will not have a significant amount of money tied up in a non-liquid asset. If you want to focus all your energy on running and growing your business, continuing to lease may be your best option.

Bryce Sinner is in-house counsel for Stellar J Corporation, a Woodland-based multi-state construction company focusing on water and wastewater infrastructure, and manages procurement, claims and dispute resolution, as well as corporate and construction legal matters. He can be reached at 360.225.7996 or bryce@stellarj.com.

Kelly Walsh is an attorney in the Vancouver office of regional law firm Schwabe, Williamson & Wyatt, focusing her practice in the areas of eminent domain/condemnation, commercial and business litigation and construction law. She can be reached at 360.905.1432 or kwalsh@schwabe.com.

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