Tulsa Commercial Real Estate: Should I Lease It or Should I Buy It?

By U.S. SBA Entrepreneur of the Year, Metro Chamber of Commerce Entrepreneur of the Year, U.S. Chamber Options(5)’>National Blue Ribbon Quality Award Winner and Cofounder of Fears & Clark Tulsa Real Estate Group Clay Clark

 

In the current economic state that we all live and work in, many Tulsa business owners that I have consulted with recently are asking the same question, “Should I lease commercial property or should I buy commercial property?” For those business owners that already own commercial real estate, many are also asking, “Should I sell my current commercial property? Should I sublease it out? Or should I downsize? Should I take advantage of the slow market and purchase a building right now?” These all great questions and over the next few paragraphs we will answer each of these questions. So my reader friend, let’s get on with it.

Without getting too specific with you (and to prevent you from having to read a small novel), here are my thoughts…If you own a business that is thriving or at least making a consistent profit and you are certain that your business model will not become obsolete in the next 15 years (during the term of your commercial loan), then I would advocate that you buy Tulsa real estate.

There are many business models that simply will not make it another 15 years, however there are numerous ones that will. Let me give you some examples of some business models that will make it another 15 years. Plumbers will still be needed 15 years from now. Electricians will still be needed 15 years from now. Professionals that work in the marriage industry will still be needed 15 years from now. Tax professionals will still be needed 15 years from now. Attorneys will still be needed 15 years from now. If you are in a profession that will continue to be here for the long haul, then you need to buy a commercial property.

Unless you work from home, you are going to be paying for space in any case. Over the next 15 years, you will be either making someone money, and building up equity in your own building or you will be building up equity for someone else in their building. I personally love it when other business owners choose to pay me a monthly amount to lease space from me. It’s great. It allows me to fundamentally get free commercial office space, courtesy of their payments to me. I know that I will be in business for many years to come (us serial entrepreneurs simply cannot stop), and I know that most business people are not certain of their long term business prospects. Thus, for a most businesses they would rather pay lease payments to someone else. This someone else could be me or you. You just have to decide if you are ready to pull the trigger. Just to bring a little more clarity to issue, let me give you an example.

In 1999 I started DJ Connection out of my college dorm room. DJ Connection now provides wedding entertainment for nearly 4,000 wedding events per year. Sometime around 2003, I began to realize that DJ Connection was going to be around forever, because weddings were going to be around for ever. At first I started out working as a wedding entertainer because I wanted a sustainable way to make money in between my other gigs. However, over time I discovered that weddings were in truth the sweet spot of the entertainment industry. I could either be a starving DJ talent roaming Tulsa looking for your next gig, or I could be consistently paid well by brides and grooms. I decided to focus on weddings.

As the wedding business grew, I started occupying more and more space. The business grew so quickly and so exponentially that my wife and I moved from meeting with brides and grooms at Panera Bread and Starbucks to meeting with a new custom built south Tulsa base. We added a separate entrance to the home just for the couples so that they would not have to enter into our house the traditional way. Then we outgrew the house. Then we moved to a 5 acre super huge home. This massive home provided a great place to meet with up to 2 brides and grooms at a time. This location also provided a place for all 10 of our workers to office. Over time we simply outgrew this space. We moved to a huge office space. Now with nearly 10,000 square feet of occupied space being used, we find ourselves running out of space again do to expansion. So the question is, should we buy commercial real estate or should we lease? The answer for us is simple. We personally are going to buy commercial real estate.

We are in the process of building our very own location. With the price of construction at ultra-low levels, with contractors desperate for work, with the price of steel so low, with the price of land at low levels, with city’s desperate for tax revenue, it just makes sense. It is time to buy our own commercial land and property. The trick will be to build or buy a building that is great for us, but that is also super-leasable so that we can lease out any of the unused space to various other would-be commercial tenants in the area.

Basically, I believe that we should build a 20,000 square ft. building at a cost that will make our monthly commercial loan payments roughly equal to our current commercial lease payments. It won’t cost us anymore monthly to own this building then it would to actually lease space for the foreseeable future. With the unused space, we will lease it out. As the businesses grow, we can simply decide to occupy more and more of the space while subleasing out less and less of the space. However, as we move into our new building we must focus on making sure that our current monthly mortgage payment will be less or roughly equal to our current payment. If we move into a building that costs us 2 times per month what we are currently paying then that does not make sense. We want to be able to actually make a cocksure income and potentially office our business for free after receiving the sublease income.

As a general rule, I would make sure that your monthly commercial loan payment for your new space does not exceed what your monthly commercial lease payment would be. From my experience, it simply does not make any sense to spend more and more of your hard earned cash flow on your office space simply to acquire commercial real estate. You need to focus your cash on your core business. If you are a Doctor you need to focus on marketing your practise, improving the quality of your product, paying your people and making a profit. Don’t disport 80% of your cash flow into your monthly commercial loan payment, this will kill your business. Be self-disciplined enough to be prudent when buying Tulsa commercial real estate. Tulsa has many great properties available, but there are only a few out there that will make sense for you. The goal is to simply apply your monthly lease payment that you are currently paying into a monthly commercial mortgage loan payment. Thus, 15 years from now you will have successfully completely paid off the location of your business.

When you are buying a commercial property I would recommend that you would focus on 3 variables only. One, where is the property located? Two, how leasable is the building (can it be used by other tenants or is it specific to your business? Three, what is the monthly mortgage payment going to be?

My friend, if the property is located in the hood, it will always be located in the hood. You can’t put a perm on a frog. If your property is located in a terrible location then it will always be located in a terrible area. If you own a pawn shop, liquor store and bail-bonds super center then possibly being located in the hood is not a bad thing. But, buying a building in a bad area is a bad idea. Your customers will not want to come there. You are going to have a hard time marketing it later and your building will be hard to lease or sublease out in the future.

If you property is built to only house a gym or fitness center your uses are very limited. If your building could be used by a variety of commercial clients and tenants then you might have a winner. Don’t get a building with only one use. Do not paint yourself into a corner. There is one commercial property in Tulsa that I know of specifically that is bank owned. The former owner spent nearly every dime he had and every dime he could borrow into turning this property into the “Taj Mahal” of commercial buildings. However, there is one problem. The building was built out to be a fitness gym and it can only work as a fitness gym. How many lawyers, doctors or plumbers around Tulsa want mirrors on every inch of wall in their building? How many business professionals in Tulsa want a pool in their office? However, come to think about it…I would like a pool in our office…

If the monthly mortgage payment is super high and diverts too much of your cash flow away from your core business then you should not buy the property. You are in the business you are in to make money. Don’t pillage and plunder your business revenue simply to acquire a commercial property. Make sure your current monthly office space disbursements do not exceed the new monthly mortgage payment you will be paying in your new space. Stay centred?

If you buy a commercial building right, you will be directing your current lease expense into an equity building commercial real estate investment. You will be during an expense into a wealth builder. You will be building up equity while you stay focused on your core business. You will be able to sell your business as a viable retirement option 15 years from now. You will be able to sublease out unused space to various tenants in coming years. Buying commercial real estate can truly be a wealth builder or a wealth destroyer.

Take a few hours and think it over. Really look at the numbers and ask yourself, “Should I buy or lease my commercial real estate?”

Clay Clark
U.S. SBA Entrepreneur of the Year
Metro Chamber of Commerce Entrepreneur of the Year
U.S. Chamber National Blue Ribbon Quality Award Winner
Cofounder of Fears & Clark Tulsa Commercial Realty Group

 

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