Balance the risks and rewards for today and tomorrow.

Companies currently in the market to lease commercial space will find what are considered favorable conditions for those willing to bite. But knowing what may develop a few years down the road, thoroughly consider before singing off on the terms to avoid getting bitten. The financial issues involved in a lease obligation are complex. All the pros and cons are not always fully understood or analyzed in the beginning.

A popular thought now is many landlords have their hat in hand and a tenant, certain of their business revenue, is wise to lock-in a long term lease at low rates before inflation kicks in and/or the market comes back. But wait. This may not always be the best course of action.

Incentives

Undoubtedly the current high number of vacancies and stagnate growth in the economy have tipped the market in the tenant’s favor. Landlords are back to offering incentives such as free rent and tenant improvement allowances to entice deals. However, regardless of the incentives offered, they probably will increase your lease obligation. More than likely free rent on the front end is compensated by an equally extended term on the back end. Also, the tenant improvements are paid back, with interest, by the tenant one way or another.

Rates

Base or Net rates have less flexibility than most renters realize but some creative structuring such as step-up rates and rent credit programs can allow a tenant and landlord to find common ground. The best deals are the ones that come closest to achieving the financial goals of both parties. Most landlords understand that it’s worse to do a bad deal than no deal at all. Tenants need to understand this is also true for them and if a deal is too good to be true, do more due diligence on the landlord.

Finances

Whether it’s for tenant improvements, maintenance budgets or property financing, the landlord’s finances need to be adequate and sound. Many properties have an unsustainable debt commitment and are a greater risk of default or deferred maintenance issues. Tenants need to know the status of the landlord’s credit and have lease provisions if the landlord does not perform on their obligations. Healthy balance sheets on both sides are important now more than ever.

Accounting

If your company uses generally accepted accounting principles, or GAAP, you may be soon faced with a change that effects how your lease is booked. To adhere with International Standards as soon as 2013, your active lease, options included, will need to be recorded as an asset and liability on the balance sheet. This may trigger debt covenants with lenders or otherwise affect your credit rating. The result would suggest that for companies already heavily leveraged, a shorter term leases might be desirable. Or, if the right financing is available, buying may make more sense.

Purchasing

The market for attractive buying opportunities will continue to improve. As long as lenders release their troubled assets and job recovery shows minor movement, the market will act as though it has found the bottom. We may not be there yet. But with low lending rates and what many expect is a future of more regulation and high inflation, the case for purchasing an asset is pretty attractive now.

With ownership comes more control of your space, beneficial tax considerations and access to government financing programs. Its worth checking with your accountant to see how different scenarios such as buying the building personally and then leasing to your company can be advantageous to you at tax time.

With the creation of more energy efficiency improvement programs such as Property Assessment Clean Energy (PACE), smart property owners have access to financing to help make their commercial properties run more efficiently. Energy improvements can improve the bottom line and promote more motivated employees.

Conclusion

If property ownership is not in the cards now, leasing is still a very attractive route but you need to examine all the facts and potential scenarios. Listening to all the media chatter, you can find a contrarian view to any real estate opinion. It’s all about shutting out the noise and doing what makes sense for you and your company’s goals. Today’s changing market is bringing out many opinions and exposing many opportunities. With the counsel of a commercial real estate advisor, you can balance the risks and rewards to make strategic decisions that are the best fit for your business today and tomorrow.

flickr photo cred: Simonds

This post originally appeared on Positive Absorption.