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Lease vs buy calculator for commercial property
Compare the cost of leasing your business premises with buying a building over the same period: rent with escalations and additional rent on one side; the down payment, mortgage payments, operating costs and the equity you get back on resale on the other. Both are converted to today's dollars at a discount rate you choose. Works for industrial, office and retail users in Canadian or US dollars; nothing leaves your browser.
Results (today's dollars, before income tax)
- Owning costs less
- $363,806
- Present cost of leasing
- $3,721,359
- Present cost of owning
- $3,357,553
- Value change at which they are equal
- 1.02% / yr
- Paid up front to buy
- $2,280,000
- Monthly mortgage payment
- $24,535.15
- Building value at the end
- $7,313,967
- Loan balance at the end
- $2,954,582
- Owner's equity after the sale
- $4,139,965
- Total rent paid (not discounted)
- $5,124,881
| Year | Leasing | Owning |
|---|---|---|
| 1 | $450,000 | $444,422 |
| 2 | $462,850 | $448,172 |
| 3 | $476,069 | $452,016 |
| 4 | $489,668 | $455,955 |
| 5 | $503,658 | $459,994 |
| 6 | $518,051 | $464,133 |
| 7 | $532,857 | $468,376 |
| 8 | $548,089 | $472,725 |
| 9 | $563,759 | $477,182 |
| 10 | $579,880 | $481,751 |
Works in Canadian or US dollars: enter every amount in the same currency. Calculated in your browser; nothing is sent or saved.
How it’s calculated
- Lease cost (year t)
Area × (net rent × (1 + escalation)^(t−1) + additional rent × (1 + cost growth)^(t−1)) - Ownership cost (year t)
12 × monthly mortgage payment + area × owner operating costs × (1 + cost growth)^(t−1) - Equity at the end
Price × (1 + appreciation)^years × (1 − selling costs) − loan balance - Present cost of owning
Down payment + closing costs + Σ ownership cost ÷ (1 + discount rate)^t − equity at the end ÷ (1 + discount rate)^years
Worked example (illustrative numbers)
- A distribution business needs 20,000 sq ft for 10 years. Leasing costs $16.00 per sq ft net, rising 3% a year, plus $6.50 per sq ft of additional rent growing 2.5% a year: $450,000 in year 1 and $579,880 in year 10, $5,124,881 over the ten years.
- A comparable building is for sale at $6,000,000. With 35% down and 3% closing costs, $2,280,000 is paid up front. The $3,900,000 mortgage at 5.75% over 25 years costs $24,535.15 a month ($294,422 a year), and the owner's operating costs are $7.50 per sq ft growing 2.5% a year, so ownership costs $444,422 in year 1 and $481,751 in year 10.
- If the building is worth 2% a year more after 10 years ($7,313,967) and sells with 3% selling costs, the owner repays the $2,954,582 loan balance and keeps $4,139,965.
- At a 6% discount rate, leasing costs $3,721,359 in today's dollars and owning costs $3,357,553, so owning comes out $363,806 cheaper. The two are equal at about 1.02% appreciation a year. With no appreciation, leasing would be $347,894 cheaper; over 5 years instead of 10, the two are within $8,166 of each other.
Illustrative figures for a fictitious business and building; they are not market rents, prices, interest rates, appreciation or operating costs for any city or property type.
What the comparison shows, and what it leaves out
Leasing and owning are both ways of paying for space. Leasing spreads the cost over the term and leaves the building's value, and its risk, with the landlord. Owning needs cash up front and ties up capital, but every mortgage payment builds equity and the business keeps any rise, or takes any fall, in the building's value. The fair comparison is therefore not this year's rent against this year's mortgage payment, but the whole stream of payments on each side, including what the owner gets back on resale, converted to today's dollars.
The discount rate is the return the business could otherwise earn on the money it puts into the building. A business that would invest the down payment in its own operations at a high return should use a higher rate, which makes owning look more expensive; one with surplus cash earning little should use a lower one.
This calculator works before income tax. In practice rent is usually deductible as an expense, while an owner deducts interest and capital cost allowance (Canada) or depreciation (US) and may owe tax on a gain at sale. Those effects can change the answer, so ask an accountant to model them for your business. Arithmetic only: this is not an appraisal, a loan offer, or financial, legal or tax advice.
Choosing the inputs
Use the net rent and additional rent (TMI, CAM, or NNN charges) from a real quote for space you would actually lease, and the escalation in that lease. For owning, use the asking price of a building that meets the same needs, the down payment and rate a lender has indicated, and the costs an owner pays that a tenant would not: property taxes and insurance are usually similar to the additional rent, but an owner also pays for the roof, structure, parking lot and building systems, so include a reserve for capital repairs.
Appreciation has the largest effect over a long period and is the most uncertain input. The calculator shows the appreciation at which leasing and owning cost the same; if that figure is above what you are comfortable assuming, the case for buying rests on reasons other than cost.
Reasons that are not in the numbers
Owning gives control: the business decides on improvements, cannot be asked to leave at the end of a lease, and can lease out surplus space. Leasing gives flexibility: it is easier to expand, shrink or move, the capital stays in the business, and the landlord carries the building risk. A fast-growing company or one unsure of its space needs in five years often values flexibility more; an established business with specialised improvements and a long horizon often values control more.
Some owner-occupiers buy through a separate holding company and lease the building to their operating company, which can separate the real estate from the business for financing and succession purposes. That structure needs legal and tax advice.
When the building is for sale to a user
Listing brokers marketing a building to owner-occupiers can help buyers make this comparison by stating the facts it needs: area and its measurement basis, property taxes and operating costs for a recent year, the condition and age of the roof and building systems, and any existing financing. In OfferingStack, a for-sale listing's building specifications, property details and financing pages carry the figures you enter, calculated values are labelled, and pages without data are left out.
Questions
Is it cheaper to lease or buy commercial property?
It depends on the price, the rent, the financing, how long you stay, the building's value at the end and the return your money could earn elsewhere. In the worked example owning is $363,806 cheaper over 10 years at 2% appreciation, but leasing is cheaper with no appreciation, and over 5 years the two are almost equal.
What discount rate should I use?
The return your business could earn on the cash it would put into the building, or its cost of capital. A higher rate favours leasing, a lower one favours owning. Try a range rather than a single figure.
Does the calculator include taxes?
No. It compares cash costs before income tax. Rent deductions, interest, capital cost allowance or depreciation, and tax on a gain at sale can change the result, so have an accountant review the comparison for your business.
What costs does an owner pay that a tenant does not?
Usually the capital items a landlord would otherwise carry: roof and structural repairs, parking lot replacement, major building systems, and vacancy risk if part of the building is leased out. Include a reserve for them in the owner operating costs.
Is my data saved?
No. The calculation runs in your browser and nothing you type is sent to OfferingStack.
Related
Put the numbers in a finished offering memorandum.
Upload your fact sheet or rent roll, add the NOI and price, and review a watermarked preview of the financial and pricing pages before you buy anything.