Property
Buying Commercial Property Versus Leasing It
“Stop paying someone else's mortgage” is the most repeated argument in commercial property and one of the least examined. Ownership is sometimes excellent and sometimes the thing that starves a good business of capital.
Key points
- Commercial mortgages are not home loans: larger deposits, shorter terms than the amortisation schedule, and frequently a balloon payment at the end.
- Lenders size the loan on the property's ability to service debt — the debt service coverage ratio — not on your enthusiasm for it.
- SBA 504 exists specifically to let owner-occupiers buy with a far smaller deposit than conventional terms require.
- The real comparison is not rent versus mortgage payment. It is total occupancy cost plus the return you forgo on the capital tied up.
- Buying concentrates two risks — your business and one property — in the same place.
How a commercial mortgage differs from a home loan
Owners often assume commercial borrowing works like a residential mortgage at a slightly worse rate. The structure is genuinely different.
Deposits are larger. Conventional commercial lenders typically expect a substantial share of the purchase price in cash — considerably more than a residential buyer would put down [VERIFY: typical conventional commercial mortgage down payment range and current rate environment — verify with lenders].
The term and the amortisation are different numbers. This is the critical structural point. A loan may be amortised over a long schedule but have a much shorter term. Payments are calculated as though you were repaying over the long schedule, but the full remaining balance falls due at the end of the short term.
At the end of the term you must repay the outstanding balance — usually by refinancing. That means returning to the credit market at whatever rates and conditions exist then, with whatever your business and the property look like at that point. If credit has tightened, or the property has fallen in value, or your trading has weakened, refinancing can be difficult precisely when you can least afford it. Know your balloon date before you sign.
Rates are often variable or periodically reset, and long fixed periods are less common than in residential lending.
Recourse is normal. Most small commercial loans are recourse, meaning the lender can pursue you personally beyond the property. Non-recourse terms exist mainly for larger, institutional-quality assets.
Prepayment is often penalised through defeasance, yield maintenance or step-down penalties. Check what early repayment would cost.
What the lender is measuring
The central metric is the debt service coverage ratio: net operating income divided by total debt service. A ratio of 1.0 means income exactly covers the payments with nothing spare. Lenders require a cushion above that, with the required margin varying by property type, lender and market conditions.
For owner-occupied property, the analysis blends the property and your business, since your trading generates the income servicing the loan. Lenders will therefore examine business financials as closely as the building.
They will also look at the loan-to-value ratio, an independent appraisal, the property's condition and environmental status, your industry, and your personal financial position.
SBA 504 changes the deposit arithmetic
For owner-occupied commercial property, the SBA 504 programme is frequently the difference between buying and not buying. It combines a conventional bank loan with a debenture issued through a certified development company, allowing a substantially smaller borrower contribution than conventional terms, usually at a long fixed rate on the SBA portion.
There is an owner-occupancy condition — your business must occupy a specified minimum proportion of the building, with different thresholds for existing and newly constructed premises [VERIFY: current SBA 504 owner-occupancy percentage requirements, contribution percentages and maximum debenture amounts, sba.gov]. That condition also permits leasing the remaining space to other tenants, which is how many owners make the numbers work.
The comparison most people get wrong
Setting monthly rent against a monthly mortgage payment is not a comparison. Ownership carries costs that a gross lease does not, and consumes capital that would otherwise be working elsewhere.
Add to the mortgage payment:
- Property taxes, which are reassessed and generally rise
- Building insurance, typically more expensive than a tenant's policy
- Maintenance and repairs — now entirely yours
- Capital reserves for major systems: roof, HVAC, car park, plumbing
- Property management, if you do not intend to do it yourself
- Vacancy cost on any space you intended to sublet
Then account for the capital. A deposit of several hundred thousand dollars is not free. That money could fund equipment, inventory, hiring or marketing — and in a healthy small business, capital deployed into operations often returns considerably more than property appreciation. This opportunity cost is the single most overlooked term in the equation.
And the illiquidity. Commercial property can take many months to sell. If the business needs cash quickly, the building will not provide it on your timetable.
The genuine advantages
- Fixed occupancy cost. No escalation clauses, no renewal at market rate, no landlord deciding not to renew.
- Equity accumulation. Payments build an asset rather than disappearing.
- Control. Modify the space as the business requires without seeking consent.
- Rental income from surplus space.
- Tax treatment. Depreciation of the building, and deductibility of mortgage interest, are meaningful — though depreciation has recapture consequences on sale.
- An asset independent of the business. Sell the company and keep the building; retire and hold it for income.
Hold the property in a separate entity
Where owners do buy, the property is commonly held in a separate LLC which leases it to the operating business at a market rent. This is standard practice, and there are several reasons for it:
- It insulates the property from claims against the operating business
- It permits a clean sale of the business while retaining the real estate
- It can simplify ownership where the property and the business have different owners
- It creates a documented, arm's-length rent rather than an ambiguous internal arrangement
The rent must genuinely be at market rate — related-party arrangements attract scrutiny, and there are specific tax rules governing self-rental. Set this structure up with an accountant and a lawyer at the outset; restructuring afterwards can trigger tax consequences.
When buying is genuinely the better decision
Ownership tends to make sense when several of these hold:
- The business is stable and established, with predictable revenue over several years. Property is a long commitment and an early-stage business needs flexibility more than it needs equity.
- You have surplus capital. The deposit is not money the business needs for growth, and paying it does not leave you thin on working capital.
- Your space requirement is predictable. Businesses that may double or halve in headcount should not be locked to one building.
- The location matters to the business — established customer base, specific catchment, expensive fit-out you do not want to repeat.
- The property has multiple tenants or divisible space, providing income and an exit route.
- The numbers work at conservative assumptions — not at optimistic revenue and not requiring appreciation to justify themselves.
Leasing remains the better answer when growth is uncertain, when capital earns more inside the business, when you may need to relocate, or when the local market is priced such that renting is materially cheaper than owning.
Build the comparison over the full horizon you would realistically hold the property. Model total occupancy cost under leasing, total ownership cost including reserves, and the return that deposit would have generated inside the business. Then run it again assuming a flat property market and revenue below forecast. If ownership still wins, it is a good decision. If it only wins on appreciation, you are speculating on property with capital your business is relying on.
Educational information only. This guide explains how US business finance generally works. It is not financial, tax, investment or legal advice, and it does not account for your circumstances. Tax figures change annually and rules vary by state — anything highlighted for verification must be confirmed against current IRS or state guidance. Consult a qualified professional before acting. See the full disclaimer.