The Big Question: BUY VERSUS RENT

Experts weigh in on the key things to consider when you’re deciding whether to rent or buy a location for your eyecare business

Erinn Morgan

Should you rent or should you buy? According to real estate experts, the ability to answer this supremely important business question boils down to foresight, intuition, and math.

“The short answer is that you should always own when you have the opportunity, but you should never own if there’s a lease opportunity that will allow you to produce far more gross sales,” says David Freid, senior vice president at Cassidy Turley, an international firm dealing in commercial and retail real estate. “Gross sales drive the decision.”

If an eyecare business has a lease opportunity where they can generate $5 million in yearly gross sales (as a result of factors such as location and visibility), this is a slam dunk versus an opportunity to buy a building where this same business estimates it can produce $1 million in gross sales.

“If it’s apples to apples as far as location and you can produce the same revenue, you always want to own your own real estate,” says Freid.

Still, today most small businesses across the country lease the space in which they operate, according to Ryan Severino, a senior economist with Reis, Inc., a commercial real estate forecasting service. “In the retail arena most organizations tend to lease,” says Severino. “Select small businesses will own, but it’s generally easier for them to not put a lot of thought or work into their location.”

Most ECPs also lease their locations, especially those located in metro areas. “The majority of optometrists lease early on in their career when they’re developing their practice,” says Al Cleinman, president and CEO of Cleinman Performance Partners, an optometry practice management group.

Adds Allan Barker, OD, president of eyecarecenter, which has 55 optometric locations in North and South Carolina, “If I had to guess, I’d say about 30 percent of optometrists own their space and 70 percent rent, but more are renting today. When I came out of school, I was $3,000 in debt, but now they are coming out $203,000 in debt. The bank is going to be much more inclined to give you a loan if there’s no school debt.”

THE CASE FOR BUYING

While leasing a space has its obvious benefits, veteran ECPs make a strong case for buying—or building—a long-term business location when the timing is right and finances are in line. “What really got us going on building our own buildings was we had a few mall locations and we saw the writing on the wall—the malls had no loyalty to tenants and the rents kept going up and up,” says Barker, who notes that he and his business partner own as much as 20 to 100 percent of the space in 30 different buildings.

At Highline Vision Center in Aurora, CO, Jennifer Redmond, OD, and Jeri Schneebeck, OD, are enjoying the new office they built after leasing space in a medical building for many years. “We needed to solve several problems—we were outgrowing our space and we wanted more visibility,” says Redmond.

“Plus, rent goes up every single year and you have no control over that, so you may as well rent to yourself,” she continues. “Buying or building is not without risk, but if you do it in a smart way and get people who know what they’re doing to help you, it will be beneficial.”

At the five-location Europtics in Denver, president Ira Haber says he regrets never buying or building space for his retail business. “If I had it to do over again, I would not rent space—no matter what,” he says, noting that he pays a combined $55,000 a month in rent.

Haber says he has watched the success of a retail peer who ran a menswear shop and chose to buy a lot and build in the then-up-and-coming Cherry Creek area of Denver. “He probably spent $1.5 million on it in 1987 and today it’s probably worth $7 to $9 million and he’s probably charging about $60,000 in monthly rents,” says Haber. “I wish I had done it.”

THINGS TO CONSIDER

There are factors to consider when deciding to rent or buy. “Things to think about include where your business is and where you see it going, where the economy is, plus what stage of life are you in,” says Severino.

Another key consideration is what your business might look like in 10 or 15 years. “One of the biggest mistakes I see made, whether buying or leasing, is people misjudging their own growth factor,” says Cleinman. “We have some clients that are landlocked, even on the lease side. That’s why it’s so important to look at what the 10- and 20-year plan is.”

This goes for leasing, too, and Cleinman suggests a first-right-of-refusal lease clause for space in your building if it becomes available.

Finally, experts suggest that it’s a mistake to do it yourself. “Most doctors try to do it themselves or have a lawyer do it, but it’s times like these to surround yourself with experts,” says Cleinman. “We have our clients work with a tenant-buyer representative—all they do is negotiate purchases and leases and they have access to comparatives all over the country.” EB

Pros & Cons

Though buying or building a location for your eyecare business is a savvy move, leasing a space for your office also has its upsides. Here, we look at the pros and cons on each side of the Buy Versus Rent question.

LEASING:THE UPSIDES

■ Good Timing:According to Ryan Severino of commercial real estate forecasting company Reis, Inc., today’s market is good for leasing commercial space. “Retail centers are still struggling and you have more negotiating power today,” he says. Though a recent report from CoStar showed positive rent growth in 70 percent of U.S. retail markets during the first quarter of 2013, it’s unlikely that rents will soar again soon.

■ Leverage: Because of the market’s climate, renters have a wealth of negotiating power today. “It is overwhelmingly a tenant’s market,” says Severino. “You have a lot more leverage in negotiating rent, lease terms, and tenant improvement money to spruce up the space.”

■ Less Commitment: For those who may eventually be interested in moving or buying a location for their business, a leased space provides flexibility. “You’re typically on the hook for the lease for just a few years,” says Severino. A leased space also enables business owners to focus solely on their business.

■ Fewer Headaches: When something goes wrong in a leased space tenants simply call the landlord, who is responsible for the ongoing maintenance.

■ Minimal Up-front Costs: When compared with buying, the up-front costs associated with leasing a space for your business are minimal.

■ More Stability and Control: If you own it, you control it. You can change the space as you see fit and no landlord will be asking you to leave.

■ Increased Visibility: At Highline Vision Center in Aurora, CO, the building process for their new office drove in new patients. “We get lots of compliments now and lots of new patients say they watched us being built,” says Jennifer Redmond, OD.

BUYING:THE UPSIDES

■ More Headaches: If you own the building or office space, you’re ultimately responsible for anything that needs to be fixed. “You cannot neglect the property and it will take up more of your time,” says Severino.

■ Bigger Up-front Costs: The costs to buy, including costs for appraisal, building inspection, loan fees, and down payment, will be much higher than those involved with leasing. “Then you’re on the hook for the mortgage,” says Severino.

■ More Commitment: Moving or expanding isn’t an easy option after you’ve purchased your space. “In as little as a five-year period your neighborhood dynamics can also change,” adds Al Cleinman, president and CEO of Cleinman Performance Partners.

■ Tied to the Market: If your building is in an area of appreciating values, you will likely sell your space at a nice profit. But in a down market, the profits may not be as sweet. In addition, a great location could turn out to be not so good. “We have one location with a really beautiful building, but the neighborhood around it has gone really bad,” says Barker.

■ Fewer Options: The best location may not be available. Says Barker, “You can’t always get the best location if you’re set on owning. Sometimes we’ve bitten the bullet and just rented. However, you can find a piece of property if you look hard enough.”