My Lease is Keeping Me from Purchasing or Building New Construction
Dispelling Commercial Real Estate Myths
If your business or practice is thriving, then it’s exciting to think about what’s next. What future growth will come? What innovations will you adopt? And what kind of footprint will you need for your business or practice to reach its full potential?
Those are exciting questions to consider and if that is you, you also may be thinking, ‘As soon as my lease ends, then…” If you think your lease is preventing you from taking the next steps in growing your business or practice, it’s not. Most people think the costs and penalties associated with breaking a lease are too much to even consider. However, that isn’t always the case.
Let’s look at this more closely and start with a scenario where you have several years left on your lease and let’s say it will cost you $50,000 to break your lease. That number seems like a lot of money until you consider the alternative. Let’s consider the true cost of not breaking your lease and trying to save that money.
Construction materials and labor are steadily climbing and have increased roughly 5-7% per year since 2015. Construction costs in 2015 to build an $800K building would cost $1M – $1.1M for the same building today in 2019 in the majority of markets across the country. These increases are almost guaranteed unless the market has a substantial correction. If this is you and you wait even 1 year, it could easily cost you roughly $50,000 – 75,000/year in increased construction costs for the same product you could have today.
Interests rates are another important factor to consider when thinking of taking the next step for your business or practice. If interest rates increase by .5% – 1% between now and 1-2 years from now (which is likely), this will have a significant impact on the cost of your loan. On a $1M project, a 1% increase in financing means $10K per year every year for the next 20-25 years. A ½% = $5K per year every year over the next 20-25years. This is a $100K – $200K impact on your bottom line.
Lost Revenue / Production
Finally, the cost of lost revenue / production and new business / referrals generated by doing a new and larger office could be substantial. By not moving forward now, there is a guaranteed loss of production. Say an exam room, operatory or needed extra space costs a minimum 50% of full capacity. Two additional operatories for a Dentist could gain over $80K in production at ½ capacity. This is production that is lost every year moving forward is postponed. Additionally, the sooner you get a new office, the sooner you receive new internal referrals and growth that everyone knows comes from doing a new office.
Loss of Prime Location / Competition
Prime locations and opportunities don’t last forever. Have you considered that someone else’s lease may finish before yours or that they may break their lease to grab the same opportunity you are waiting for? Opportunities and locations will not wait for you, they are on a first come, first serve basis. If you wait, you may miss the chance to secure the best location for your next endeavor.
Additionally, the cost of real estate itself follows the same trend of increasing interest rates and construction costs. Waiting to purchase or build on a piece of property could be a wash when considering the cost to break your lease versus the increased value of a piece of property from one year to the next.
In all, the increased costs due to construction can easily cause the lease savings to be a moot point or a near wash. Then, the risk of increased interest rates and lost productions could end up costing hundreds of thousands of dollars, in addition to missing an opportunity that could be taken by someone else.
If you are in the scenario where your business or practice is growing but your lease isn’t going to expire soon, it’s important to sit down with an expert agent who can give you a detailed analysis of the costs vs savings of moving now vs later and to help you execute the best plan moving forward.
Finishing your lease and doing your next project in several years could be your best option. Alternatively, you may find yourself in a position to save tens to hundreds of thousands of dollars by putting together a new project now. As is the case in many aspects of business, you should take a much closer look through the eyes and mind of an expert to capture the true cost and savings of each opportunity.
To find an expert agent near you to discuss your terms and options, click here.