Should We Buy or Lease our Real Estate?
It always depends on the particular deal, so the discussion and opinions that follow are intended to be general in nature.
We don’t use a standard “lease vs. buy” model. While financial considerations are important when deciding whether to buy or rent real estate, we think non-financial factors can often be more important. These include flexibility, control, ability to finance, and diversification.
We recommend always going for the best site; whether you lease or own is less important than securing a top location for your restaurant. Sites being equal though, we tend to favor owning real estate for the following reasons:
- Flexibility and control. The ability to sell, close locations, and finance – all without landlord approval.
- Real estate is the easiest asset in the restaurant industry to finance. You can get the lowest rates, as well as the longest and best terms.
- When you own, you can sell real estate or lease it out. On the other hand, if you’re stuck with a bad, long-term lease, it can haunt you for years. You can pay off your other debt, but you’re still stuck with that lease.
- Wealth building, appreciation, and diversification. Many of our clients have built significant wealth by paying themselves instead of a landlord. As Mark Twain said, “Buy land, they’re not making it anymore.”
One asterisk to our buy-over-rent recommendation is that desirable tenants can often cut favorable deals with their landlord that can’t be replicated via ownership; we advise you to jump on these opportunities!
It is difficult to generalize which has a higher cash flow. Owning will generate higher EBITDA (no rent) but most bank covenants now use rent-adjusted leverage. That is, debt + rent x 8/EBITDAR and EBITDAR/debt service + rent. This effectively eliminates the difference and treats leasing as if it were debt.
Each deal needs to be individually analyzed, but all other things being equal, owning your real estate and enjoying the benefits of control and flexibility has always struck us as the better option for most of our clients.