The iron is hot for tenants that want to be their own landlords, and many are striking before it cools.
Ultra-low prices for distressed suburban commercial real estate are driving businesses to buy their own property and realize the advantages of owning, even as the traditional challenges inherent in operating buildings loom.
Owner-occupiers spent $248.5 million in Massachusetts in 2010 to purchase office buildings, up from $90.7 million last year and $34.7 million in 2008, according to statistics from Lincoln Property Co.’s (LPC) research group – despite a drop this year in overall commercial real estate sales to $1.3 billion from $1.9 billion in 2008.
The lion’s share of those purchases came from Shire Pharmaceuticals’ acquisition of a $201 million campus in Lexington. But the general number of owner-occupier transactions is up because financing is cheaper and many national and international institutional players are unwilling to purchase a vacant or poorly leased asset in today’s environment.
Comfort Level
Even so, new landlords can face a palette of pitfalls after purchasing a property, especially commercial tenants accustomed to arriving at an office where their telephone lines, HVAC systems, snow plowing and other necessities were previously all accounted for.
"[As a tenant] your taxes are paid for and the operating expenses are covered within the rental rate," Mark Norton, a senior associate with LPC, told Banker & Tradesman. "There are a number of line items that you don’t need to think about, so you can focus on your business. Many companies prefer leasing to owning because it’s a strategy of flexibility. They can close up or expand. That flexibility is gone when you own the bricks and mortar."
But more companies seem to be comfortable with being their own landlord. For many, the prospect of having room to grow is attractive.
Frank van Mierlo, co-founder of Lexington-based solar cell manufacturer 1366 Technologies, said the company is currently considering purchasing a new headquarters. No decision has been made, but van Mierlo said landlords are often "a pain" to deal with, and do not necessarily have their tenants’ best interests in mind.
While many financial advisors say leasing is cheaper in the long run and better for the company, van Mierlo is more concerned with flexibility, and the challenges of selling a building, versus the ease of breaking a long-term lease.
"Neither of those are pretty, but it’s not clear to me yet which is hardest," he said. "The funny thing is if you talk to a financial genius, they will tell you that leasing is better for your company, but if you ask what he does at home, he says he owns his own home. You want to do the things you’re good at. Being a landlord is a completely different business and not necessarily something we excel at. The question is which is cheaper, paying your mortgage or paying your rent?"
Making Sense Of Numbers
But some companies excel at operating real estate, especially those with employees dedicated to the endeavor. One such company is NELCO, which designs and manufactures products for the medical and industrial industries. NELCO bought Two Burlington Woods in May for $3.25 million after GE Capital seized it from Griffith Properties.
The company has expanded and moved several times in the last decade, and was looking for a permanent home. Company executives began exploring the idea of purchasing property in 2007, but decided real estate prices were too high to justify it at that time, according to President and CEO Richard LeBlanc. In late 2009, they began the search anew after values dropped precipitously.
"The numbers began making sense," LeBlanc said. "It’s not costing much more than if we had leased. The building entity [created by NELCO to purchase the building] is subsidizing the market-based rent. We had a business need because we had to either commit to more leased space and expand our administrative offices, or take advantage of lower market pricing. When you look at the whole investment, it washes and ends up being neutral."
Another reason commercial tenants could be pushed to purchasing space is a possible change in the tax code that could occur in the near future, revising accounting standards to require leases show up as liabilities on company balance sheets.
The Financial Accounting Standards Board (FASB) is considering new requirements that would force companies to report leases in their statements of financial positions just like they would for a liability such as a loan. The change could occur as soon as 2012 or 2013, according to industry experts.
If new regulations are put in place, firms would no longer be able to deduct 100 percent of their rent from the books. That could steer many toward owning property, although those new regulations would likely affect companies with several leases that did not show up on their balance sheets. They would apply to equipment leases as well.
