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QUESTION
Write an academic paper explaining reasons why firms (borrowers) prefer to lease the
property rather than own the premises the do business from
...
In business lease agreements,
the owner (lessor) receives financial compensation and in exchange, the tenant (lessee) is
given the right to operate his or her business on the property
...
In this lease the lease specifying
exact duration of tenants and all rights and duties of the landlord and tenants are stated on the
lease contract Lease of estates of year to year Is the leasehold of estate from year to year until
either party give notice to terminate the contract
...
Renting premises ties
to less capital buying and gives flexibility to relocate easily
...
The amount affordable and extra
costs such as business rates, utility bills and building insurance - will also be a deciding factor
for renting
...
Leasing against Buying of the premises
Most benefit from leasing a property is initial outlay of cash to gain the use of the premise is
less than the purchase of the premise
...
Factors influencing leasing decision or buying decision
A
...
These include;
1
...
Include changes in business operations and functions like
working hours, space customization and many others
...
2
...
Unlike rent, money used to purchase premise
is not deductible, owner is allowed to recover this outlay over time by yearly
depreciation deductions
...
Depending on several factors, such as how long have been in business, how
profitable is business has been, and what portion of the purchase price or rent relates
to the land itself rather than to buildings a purchase may actually cut your tax bill
when compared with a lease
...
Owner can consider the long-term cost
...
But over the long haul, a
purchase is usually cheaper because a landlord, in addition to paying all of the costs
associated with purchasing and maintaining the property, will attempt to build in a
profit for himself
...
4
...
Location of the premise adds value to the business
function through increase in sales and reduction in expenses
...
5
...
If you will locate in an area where you think land values
will continue to increase, it would be better to own the property (and thereby get the benefit
of this appreciation if you ever sell) rather than to rent it
...
B
...
Short term business operation
...
This enables fast revenue collection at low rent expenses and
also enables easy flexibility in relocating of the business
...
Current cash flow is of vital importance
...
With a lease, your main initial cash expense may well be
limited to your security deposit, plus first rent payment
...
3
...
Many leases place the duty of maintaining the
property on the landlord
...
4
...
You may want to buy, but have found that all
properties that would be suitable have been offered only on a lease basis
...
The land may be in an area of declining real estate values
...
In this case, leasing makes sense: let the landlord suffer the
effect of the declining values
...
A fixed lease provides for a fixed amount of rent over a fixed rental period
(term)
...
But, there is a
downside to a fixed lease: if you want to renew the lease when it expires, the landlord may
choose to raise rent sharply, particularly if your business appears to be doing well, and would
suffer from relocating elsewhere
...
Percentage lease
...
The lease provides for a fixed amount of rent, plus an additional amount that is set as
a percentage of your gross receipts or sales
...
A step lease provides for set rent increases to take effect at stated times
...
If you are
considering renting a facility under a step lease, carefully consider whether each of the
scheduled rent increases is reasonable
...
Gross lease
...
Increasingly, gross
leases contain escalation clauses, which provide that the amount of rent is to be adjusted
(usually each year) to offset increased expenses
...
A net lease transfers some or all of the expenses that the landlord is traditionally
responsible for to the tenant
...
Under a double net lease, the tenant also pays its
proportional part of insurance premiums
...
Finding the right premises to rent
It is essential to match your premises to your business needs
...
You could consider:
agents' letting boards outside the premises
local newspapers
your local council - through their Economic Development Unit
estate agents
trade associations - if an existing member is retiring or selling up
Another good way to find suitable premises is through appointing a commercial agent or
commercial surveyor
...
Commercial agents and surveyors have expertise on the property market in the area and can
keep you up to date with any new developments
...
Commission is payable to a commercial agent for acting as an intermediary between you and
the landlord or seller
...
When employing an agent to act on your behalf, you should also draw up a contract, even if
the relationship is informal
...
Alterations to the property
Planning permission is generally required if you want to extend, convert or change the
external nature of the premises - though it's not always needed if you want to make
alterations
...
You should also check with the building
control section at your local council that the work conforms to building regulations
...
You may need to get
permission from the landlord
...
Also, you should
clarify whether you will be required to reinstate the property to its original condition before
the agreement expires
...
The ratable value of business premises is based on their open market
rental value
...
You also need to be aware of liability for repairs
...
Check the terms of the lease to find out who is responsible
...
You may decide to commission a survey and ensure that any such work is finished before the
rental agreement is signed in order to avoid paying the bill
...
No down payment
...
That can have a
positive impact on your cash flow, and the amount of money in your company
...
Tax deduction
...
3
...
Depending on your lease terms, you may not have to
spend money repairing and maintaining it
...
4
...
Many times obtaining a lease does not require a credit report
...
5
...
In most markets, there are more leasable commercial sites
than buildings for sale
...
Disadvantages
1
...
Many leases are set up to allow annual rent increases, while others often
increase costs when your lease expires and needs to be renewed
...
Lease renewal ends change of business location
...
This will force
your company to move to a new location
...
3
...
By not owning the building you lease, you have no equity in it
...
4
...
With many leases, you have little control over needed property
improvements, maintenance, repairs and other factors
...
5
...
The space you lease is a specific square footage, and usually
cannot be expanded because of other companies leasing space in the building
...
6
...
In leasing agreements the land lord can
terminate the agreement through a notice to the tenant
...
The Scottish Assessors Association (SAA) is responsible for these valuations
and revises them every five years
...
Insurance
...
Running costs - eg lighting, heating and charges for services like cleaning or
security
...
Making an offer for a property
If you are satisfied that the price is fair, you can then make a conditional offer to the agent
...
If not, you may want to negotiate further to reach a mutually
agreeable figure
...
Concluding contracts on a property
You will be ready to conclude contracts with the person selling the property when:
both sides are happy with the contract
the surveyor or solicitor has made all the necessary checks and searches on the
building
any planning permission has been granted
you have raised the necessary money
Once you have concluded contracts, the purchase becomes legally binding
...
You are then ready to complete the purchase and become the owner
of the property
...
On the
completion day, your solicitor will hand over the purchase price - paid by the Mortgage
Company or lender - to the seller's solicitor
...
The last things to do after completion are to:
pay Stamp Duty Land Tax
register your ownership with the Registers of Scotland
Your solicitor receives the deeds to the property - papers giving details of the property and
the owner
...
Advantages
1
...
By purchasing a building, you don’t pay increasing
rent, and you may be able to get a fixed-rate on up to 80 percent of the mortgage loan
(USDA, SBA guaranteed loans) so that most of your monthly payment doesn’t go up
...
Finally, when the mortgage
is paid off, you eliminate its monthly payment
...
Tax deductions
...
In addition, you can write off repairs,
maintenance, taxes and many other costs
...
3
...
Purchasing a building tends to give you more space for future
growth, and can provide your business with a permanent location
...
Plus, there may be additional space available you
can lease to other companies, which generates income and may even cover your full
mortgage costs
...
Investment/capital gain
...
This adds to your company’s capital valuation
...
5
...
As the building owner, you can make the decisions on how to improve,
alter, expand and enhance the building
...
Disadvantages
1
...
Buying a building costs substantially more initially than leasing space
...
As a
result, it’s important for your company to have sufficient excess cash on hand and not use
cash required for operations for this investment
...
More responsibility
...
This can take a great deal of extra
time from you and reduce your focus on your business
...
Cost increases
...
This adds to your company’s expenses, and can have an impact on your cash flow
...
Location downgrades
...
It’s important to choose your
building in an area you feel confident will continue to do well in the future
...
Finding the right building
...
It can take a long time
to find the right building, and that can create a lengthy delay in moving and growing your
company
...
When the land values are below market value they worth
purchasing since land values increase when they are below market value if the business is to
operate for long period of over 10years
...