Financial Planning

Is Your Office an Asset or an Expense?

Deciding whether to buy or lease your facility

Woman working on laptop in law office for “Is Your Office an Asset or an Expense?”
 

For many businesses such as legal and medical practices, the inherent advantages that come with also owning the real estate used for your operation are plentiful. Along with the predictability of a stable fixed long-term mortgage payment rather than rising lease costs going forward, owning your facility can provide both potential tax benefits (e.g., mortgage interest and property tax deductions) as well as long-term asset appreciation which can help fund retirement goals in the future. If your practice isn't the sole tenant, ownership can also provide both a valuable income stream from other tenants as well as the ability to control the property's tenancy in the future.

Because it can be depreciated over time, commercial real estate can offer significant tax advantages. And given its illiquid nature, interest in a property often can be placed in trust at a highly discounted value, making it an excellent vehicle for transferring wealth across generations.

Additional diversification benefits

As technology, transparency and rapid communication continue to deepen the integration of the world's economies, what was once a high degree of non-correlation among various traditional asset classes has drastically diminished. Investors are finding it increasingly difficult to establish genuine portfolio diversification. Because of its relatively low correlation to equity markets and its ability to hedge against inflation, real estate is one of the few investments that can help minimize and smooth out the volatility of your returns.

So why doesn't every legal or medical practice purchase rather than lease their property? There are a number of factors and considerations that may make leasing rather than owning a more desirable option.

If your business is growing rapidly or a merger or acquisition is a very real possibility down the road, you'll likely want to avoid tying up assets in the purchase of space that may soon become inadequate for your needs, and thus forcing you to sell the property at a potential loss depending on market conditions. In addition, commercial real estate purchases require significant cash outlays for down payments, appraisals and potential improvements. So practices without sufficient cash reserves may want to avoid committing vital working capital to a real estate purchase. Lastly, being an owner rather than a tenant (especially if it is a multi-tenant commercial property) inevitably brings with it additional headaches that professionals who are already stretched too thin may want to simply avoid.

Real estate is a unique asset that can provide portfolio diversification, inflation hedging, positive tax treatment and overall risk mitigation. Yet direct ownership can be challenging — presenting purchase and ongoing operation complexities, as well as liquidity challenges. The opportunity for substantial returns is compelling, but extensive due diligence, expertise and guidance should always be sought to ensure that the risk-return tradeoff aligns with both the needs of your practice as well as your personal expectations.

Wondering what path is right for your business?

Let your SunTrust Private Wealth advisor help walk you through the pros and cons.

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