To Rent Or Own? Five Factors To Consider As The Prospective Franchisee

Understanding the long-range effect of your decision can be instrumental in making a better choice

SPONSOREDUpdated 2:14PM • 01/06/16

Discovery Point Child Development Centers, a near 50-unit early childhood school franchise out of Duluth, Georgia, typically purchases the land, builds a school and then offers the entire package to its new franchisees as part of their agreement. Discovery Point CEO Cliff Clark says owning your real estate takes the guesswork out of development.

“We wanted to simplify the development process for our franchisees as much as possible and that’s why we took site selection, construction and development out of the equation,” said Clark. “We believe our franchisees become better operators when they are not analyzing a real estate purchase, lease agreements, or equipment packages, but instead are focused on hiring the greatest teachers, building the right culture and providing the best education to the most important people in our business – the kids.”

But what works for Discovery Point doesn’t necessarily work for other concepts. That’s because there is no one-size-fits-all approach to commercial real estate, and such a decision must be weighed by each individual franchisee and franchisor.

Bob Simpson, the principal behind the Simpson Consulting Group, a specialist in franchise real estate site selection, says that the decision to rent or own is an individual choice, but the deals on either side of the issue are harder to find now that the market has corrected itself since the collapse of 2008.

“Whether you need to rent or can afford to own, it’s hard to find the deals that were available just a few years ago,” said Simpson. “If you are leasing or looking to purchase, it’s important to do your due diligence and work with property owners to put together a deal in your best interest. Relationships matter in the commercial real estate business and a great broker who understands the market and your brand can be worth it in the long run.”

So what do you do? We can’t tell you that, but we can make sure you’re as informed as possible before making the decision. Here are a few factors you should consider when it comes to leasing versus buying:

Cash Flow: A lease may sometimes beat out a purchase in terms of cash flow, particularly early on in the agreement. That’s because the up-front outlays associated with a lease are usually less than those required with a property purchase. However, over the long-term, a purchase is typically a more sound financial investment.

Tax Savings: Unlike rent, the money used to purchase a facility is not deductible. However, you are allowed to recover this over time through yearly depreciation deductions. If a purchase is financed, interest paid deductions are also available. Depending on several factors, such as profitability, longevity and what part of the price relates to the land itself, a purchase may actually reduce your tax bill.

Property Control: If you intend to make significant structural changes or substantial operational adjustments, you may need approval from a landlord. However, if you own the building, no one is ever looking over your shoulder, except for maybe the city zoning board.

Land Value: When it comes to appreciating value, owning versus leasing can mean a big difference in turning that appreciation into a benefit if you ever decide to sell. However, the flip side is if real estate values are stagnant or may drop, leasing makes the most sense.

Maintenance: When it’s yours, maintenance becomes an integral part of a building’s operation. Ensuring the continued structural soundness of a building, overseeing periodic repairs, and purchasing heating, cooling, electric and plumbing equipment are all your responsibility. The flip side is that many leases place the duty of maintaining a property on a landlord.

In the end, whether you lease or own, the decision has to be made based on what’s best for you and your current situation. It’s hard to find the capitalization to buy real estate, and we understand that. That’s what makes leasing usually the path of least resistance.

To Rent Or Own? Five Factors To Consider As The Prospective Franchisee

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