Do you buy or lease space?

Both have pros and cons based on your business. When Toronto entrepreneur Tristan Goguen launched an Internet service provider business in 1995, it was a gamble.

"The Internet wasn't necessarily a proven technology. It was still the early days and I had a large number of people telling me the Internet would never be accepted."

So he did what any entrepreneur would do facing such skepticism, he ignored it and launched, with some precautions. One involved a key decision every owner must address early in a startup -- whether to buy or lease space.

Mr. Goguen, chief executive of Internet Light and Power, opted to lease, a decision that would later haunt him. "We decided to be careful," he said, noting he entered into two six-month leases for space in a business tower in North Toronto off a major highway. He considered a longer lease, but "at the time, people were telling us it was a substantial risk."

Running an ISP business requires a major investment in technology and cabling, which he made.

However, near the end of the second lease, his landlord declined to renew, opting, instead, to lease the space to an expanding organization within the building.

That forced Mr. Goguen to re-evaluate his options. He knew his "plant" would require substantial upgrades as technology advanced. If he continued to lease -- even long-term -- the changes would be leasehold improvements to the benefit of the landlord. And there was no gurantee he wouldn't find himself in the same predicament.

Moreover, his company's contracts with clients didn't terminate at the same time, meaning if his lease terminated, he would still be contractually bound to provide service.

He also learned that the large telcoms he worked with were more comfortable making "infrastructure" investments in his company knowing he was there for the longterm and owning his own space would send that message.

"The rules are different for everybody," Mr. Goguen said, but after a year in business, he concluded that "for us, leasing did not make any sense." So he bought a building.

Despite the difficulty in obtaining financing in the late 1990s -- the banks didn't want to touch him even though his business was growing -- the decision has paid off handsomely.

Internet Light and Power is celebrating its 15th year of providing high-availability Internet access to companies, and "the property continues to appreciate. It's extremely cheap for us to own," Mr. Goguen said.

Now, he says, "we will decide when the property is no longer useful to the business."

Business experts say there are pros and cons on buying versus leasing and no two situations are the same. However, there are some general parameters to consider.

One is cost. Max Marechaux, a certified specialist in real estate law at Miller Thomson in Toronto, said "if you have a lease, you don't have big upfront capital contributions that you do when buying a property." That leaves capital to invest in things such as equipment or stock.

John Rider, vice-president of the commercial division at First Canadian Title, a title insurance firm in Oakville, Ont., said with leasing "it's just first and last month's rent."


For startups, that can be a big deal. Especially compared to forking over a down payment for a new property. With commercial mortgages, banks will usually fund only 65% of a building's worth, meaning business owners have to come up with a 35% to 40% down payment, he said.

Leases also have fewer maintenance headaches, Mr. Marechaux noted. "When you're renting ... you're also renting the management expertise from the landlord." Landlords take care of details such as garbage pick up, building upkeep and cleaning. "It's a service the landlord provides and frees up money and time you can use to focus on the core business," he added.

As well, buying can be extremely expensive, especially if you want to be in a downtown core. "You may not be able to find a place to buy," he said, with the result the business ends up in an unsuitable location.

Mr. Rider said businesses should consider their longterm space needs. If a company buys a building and quickly outgrows it, "you can be stuck with a building that doesn't suit you."

On the buying side, Mr. Marechaux said "you have long-term security of tenure. Nobody can increase the rent. You are your own boss. That works well for a number of people. They're responsible only to themselves and not to any landlords."

From an inves tment standpoint, Mr. Rider said, the rising property values in the past decade means companies who bought space have benefitted. A long-term mortgage can also provide more predictable fixed costs, whereas leasing leaves companies open to the vagaries of the rental market.

Buying has paid off for Mr. Goguen. He recently negotiated a "very unusual" offer with a telcom that resulted in important upgrades to his infrastructure at little cost. The telcom, he said, knows it "can safely make that investment in us and knows we're not going to be moving seven years from now."

(prepared by Jim Middlemiss/Financial Post)