Jacquie Smith, owner of Arabesque Dance and Active Wear in Gainesville, FL, considers choosing to buy her retail space
the best business decision she’s ever made. “There’s not one thing I miss about renting,” says Smith, who owns the two-story condominium space her store is housed in. “I recommend buying to any retailer who’s been open more than 10 years. It was a massive financial savings for me.”
For Smith, buying meant lower long-term costs, the freedom to build her custom space and an investment in property in a prime location. Her store has 2,100 square feet downstairs and 450 upstairs—ample space for sales and storage. It’s within reasonable driving distance of many local studios and is part of Thornebrook Village Shopping Center, a collection of 38 stores and restaurants with beautiful tree-lined walkways and plentiful parking.
But there are trade-offs to buying, as well, which may make leasing a better option for many. Indeed, making a decision isn’t always so clear-cut. With many factors to consider—including up-front cost, tax deductions, growth flexibility and maintenance fees—choosing what’s best for your store is often complicated. Here, DRN breaks down the basics of each option.
There are two main reasons that most retailers choose to lease their spaces instead of buying them: cost and flexibility. Chicago-based small-business consultant Thomas Gray says new businesses especially can benefit from this decision. “When you’re starting up, it’s important to take good care of your cash,” he says. “You make one-year deals instead of 10-year deals, and you rent rather than buy. That way your cash isn’t tied up if you grow or if your business is not as big as you’d hoped.”
Loretta Dub, owner of Loretta’s Dance Boutique in Keego Harbor, MI, is on her third location. Renting has given her the flexibility to grow with her business and find a space that she loves. Since launching in 2007, she’s moved from a 1,300-square-foot space to a 7,500-square-foot space. The one-story brick building is surrounded by windows, and it includes both her 3,500-square-foot store and an adjoining beautiful ballroom, where she hosts dance classes and events. “The main advantage to renting is the mobility—I could get up and go if I wanted to without having to worry about selling the building,” she says. “I think it’s advantageous to buy your building if you can, but my building was just too expensive, plus I’m not sure I’ll still be in it in 10 years.”
Renting also offers the comfort of knowing that the property manager will handle any necessary repairs and maintenance, freeing you up to focus on inventory and sales. “It’s much simpler to rent than own,” Dub says. “And it’s nice that my landlord takes care of all the things I don’t want to take care of—like making improvements or fixing the lighting.”
However, landlord responsibilities are not universal across lease agreements, so read the fine print before signing. Gray warns that certain operating costs—snowplowing is one example—may not be covered. “It may also be debatable which party pays security costs and utilities,” he adds. “You need to factor these in.” Enlisting the help of a lawyer to negotiate the lease terms is a worthwhile expense.
A Buying Blueprint
Ultimately, owning is an investment in more than just your business, but also in the property your business is housed in. Investigating the real estate market in your area (are property values rising or falling?) will help you decide whether investing in property has a chance of paying off down the road—justifying the large up-front cost, which usually ranges from 10 to 30 percent of the purchase price. You’ll also have to factor in due-diligence fees, like legal fees, property assessment, fees for permits and inspections and other closing costs, such as bank, processing and appraisal fees. Ask yourself, too, whether that money might be better spent in growing your business—a tough call for many retailers.
Despite those higher costs up front, more established storeowners may benefit financially in the long run
from buying their own space. Month-to-month mortgage payments shouldn’t be drastically different from rent, and, of course, costs go down significantly once a mortgage is paid off. Until then, you’ll avoid rent inflation and protect yourself from dramatic rent hikes that have forced many retailers to move away from a prime location where they’ve built up a loyal clientele.
There also are opportunities for tax savings when you buy. While all business costs are deductible when leasing commercial real estate, owners are generally eligible for greater deductions, which include mortgage interest, property taxes, property depreciation and maintenance costs.
FitSmallBusiness.com estimates buying as a money-saving investment once you’ve been in business for seven years. Smith considered herself ready to buy when she was able to comfortably pay herself a salary. “That’s when I knew I had a strong enough business plan that it didn’t feel like a risk,” she says. “I was confident I’d done all my research and knew every little expense—from taxes to maintenance.”
Unlike renters, owners will be responsible for all maintenance and updates of the space, which Smith (who remembers paying an exorbitant amount for a new air conditioner only a year after moving in) admits is the one downside to owning. Still, Smith revels in the knowledge that everything she pays for is truly hers. And she loved being able to design her ideal sales floor and a back room that perfectly fits her inventory—“six feet for jazz shoes, six feet for ballet shoes and one foot for men’s shoes,” she says. “I got exactly what I wanted.”
Rachel Zar, a Chicago-based writer, is a frequent contributor to Dance Spirit and Dance Magazine.
From top: (2) courtesy of Jacquie Smith; (2) Brian Masserman