Lease vs Buy Commercial Space Calculator

Commercial Lease vs. Buy: Making the Right Decision for Your Business

Deciding whether to lease or buy commercial property is one of the most significant financial decisions a business owner will face. Unlike residential real estate, commercial property decisions involve complex factors including opportunity cost, tax implications, business flexibility, and net present value analysis.

The Case for Leasing Commercial Space

• Preserve capital. Leasing frees up your down payment and closing cost capital for business operations, inventory, hiring, or investments that may generate higher returns than real estate appreciation.
• Flexibility. Businesses grow, shrink, and pivot. Leasing allows you to relocate, downsize, or expand without the friction of selling property. This is especially valuable for startups and rapidly growing companies.
• Predictable costs. With a lease, your occupancy costs are predictable (though escalation clauses will increase them over time). You avoid surprise maintenance costs and property tax reassessments.
• Full deductibility. Lease payments are generally fully deductible as a business expense, providing an immediate tax benefit.

The Case for Buying Commercial Property

• Build equity. Every mortgage payment builds equity in an appreciating asset. Over time, you own the property outright and eliminate occupancy costs beyond taxes and maintenance.
• Appreciation. Commercial real estate has historically appreciated 3-5% annually in many markets, though this varies significantly by location and property type.
• Rent to yourself. Through an LLC structure, you can own the property and lease it to your business, creating a tax-advantaged wealth-building strategy.
• Control. Ownership gives you complete control over the property, including renovations, subletting, and future use decisions without landlord restrictions.
• Depreciation deduction. Commercial property can be depreciated over 39 years, providing a non-cash tax deduction that reduces your tax liability.

Understanding NPV Analysis

Net Present Value (NPV) is the gold standard for comparing lease vs. buy decisions because it accounts for the time value of money. A dollar spent today is worth more than a dollar spent ten years from now. By discounting future cash flows at your opportunity cost rate (the return you could earn on alternative investments), NPV converts all future costs into today's dollars for an apples-to-apples comparison.

The opportunity cost rate is critical to the analysis. If you can consistently earn 8-10% returns on invested capital in your business, the bar for buying property is higher because that capital has a high alternative use. If your alternative returns are lower (3-5%), buying becomes more attractive sooner.

The Break-Even Point

The break-even year shown in this calculator represents when the cumulative net cost of buying (all payments minus equity built) drops below the cumulative cost of leasing (after accounting for opportunity cost on the capital). If you plan to occupy the space longer than the break-even period, buying is likely the better financial choice. If your time horizon is shorter, leasing typically wins.

Key Factors to Consider

Beyond the numbers, consider these qualitative factors: your business's growth trajectory, the local real estate market conditions, interest rate environment, your industry's typical space needs, and your personal risk tolerance. A thorough analysis with your CPA and a commercial real estate advisor will help you make the most informed decision for your specific situation.