Businesses own many assets, from monetary holdings such as checking accounts and accounts receivable to tangible property such as computers and furniture. They may include intangible assets, such as copyrights, patents, and trademarks. Businesses can also own real property—namely, land. As a business owner, you may wonder: When does it make sense to buy land for your business, and what considerations should you take into account before buying?
There are numerous benefits to buying land for your business, as contrasted with the likely alternative: renting or long-term leasing.
One reason to buy is the prospect of owning and building equity in a valuable asset. When you rent or lease, you pay significant out-of-pocket expenses each month to a property owner. If you own the land, you are paying off your mortgage each month, and thus increasing your equity, or your outright ownership of this valuable asset. What's more, this asset can be borrowed against if you need a loan.
And of course, it can eventually be sold, hopefully at a profit. There's an old saying in real estate that land is a solid investment because “they’re not making more of it!” The value of land tends to appreciate over time, particularly in major urban and suburban areas where populations are expanding. (That said, you must conduct due diligence into the politics and economics of the local area before making any decisions.)
Buying property also gives you the ability to rent out all or part of it in the future. Such rentals can create a valuable source of income for your business over time—particularly if your industry shifts or faces a sudden downturn and you have more space than you need. (Subletting all or part of your space is possible if your business is leasing, but often requires landlord consent.)
Finally, land ownership gives your business a significant amount of freedom. You no longer have a landlord who can limit your activity, and upon whose cooperation you depend. While you may be restricted by local zoning ordinances, your business will have greater autonomy than it would as a renter over important issues like signage, renovations, reconfigurations, and use of physical space. Compare that with businesses that must get the approval of their landlord before making changes in any of these areas.
Finally, there are positive tax consequences of property ownership. Depending on the specifics of your tax situation, your business may be able to deduct mortgage interest from its tax bill. The I.R.S. also permits you to depreciate the value of property over time, essentially offsetting the taxes that would be owed.
There are also significant drawbacks to buying land for your business that you should consider.
First, we are in an age when businesses need constant flexibility. Entire industries are being disrupted on a yearly, if not monthly, basis. Companies that once required multiple buildings full of office workers are now thriving with a leaner staff and better technology. A major downside of land ownership is that your business will not be able to make rapid changes with respect to its physical space.
This works in the other direction, as well: If your business suddenly outgrows the land that it has purchased, it may not be able to expand onto neighboring parcels. As a result, your business may feel stifled, or you may be forced to expand into unconnected buildings or spaces.
Being a landowner also comes with challenges of its own. As a tenant, your business likely receives certain services from the owner, such as security and maintenance, as well as access to certain communal resources. Once you become the owner yourself, these responsibilities all fall on you.
As you consider whether buying land makes financial sense for your business, be sure to take into account the hard costs of securing and maintaining the property, as well as the soft costs of the additional paperwork and supervision that will come with ownership (to say nothing of the various attorneys fees and closing costs that come with buying land).
Buying land for your business presents some legal and practical challenges, just as buying residential property can be a thorny and difficult process. Here are just a few common issues to consider.
Many government regulations require that property owners pay the cleanup costs for any environmental hazards or waste that are found on the property. regardless of whether they caused them. Contaminants are not always visible or obvious, but may have been a byproduct of a previous business on that site. Some contaminants may be underground. Before you close on the deal, hire a qualified professional to perform environmental testing.
When you find a piece of land that seems ideal, consider local zoning laws. Make sure that you are allowed to use the land for the purpose you have in mind. Even land that is zoned for "commercial use" might not permit every type of commercial activity, such as manufacturing or agriculture.
For example, local laws may allow you to build a one-story retail complex but prohibit you from building a ten-story office tower. Determine the specific types of structures and activities that are allowed on the land.
You will need to ensure that the deed, which is your evidence of legal ownership, has an accurate description of the property's boundaries in very precise terms. If there is any doubt as to the boundaries, hire a local surveyor who evaluates deeds. Doing so could help you avoid an expensive boundary dispute in court.
Owning land might make sense for certain businesses, particularly those that will be stable in size (that is, space and headcount) and scope (mission and functionality) for the foreseeable future. Confidence that the value of the land is likely to increase is a plus, too.
But ownership is not right for every kind of business, and renting commercial space is hardly a sign of failure. To the contrary, renting is the more financially responsible choice for many types of businesses. Be sure to consider these issues with your company’s accountants and financial advisers before making a decision.
