A row of storefronts that could be acquired by owners who choose to lease or buy one for their franchise site.

Lease or Buy: How to Make the Right Call for Your Franchise Location

For most franchises, location is a factor you can’t afford to get wrong. You'll need to spend time assessing your defined territory, studying traffic patterns, and finding the locations where your target customers are already spending their time. Within the best pockets of your defined territory, you could find properties that are ideal for your franchise unit. Before proceeding with any of them, take one important step. Decide whether it’s a better investment to lease or buy your franchise location.

 

Should I lease or buy my franchise location?

There are pros and cons to both buying and leasing a site for your franchise. When you buy a building—or land on which you plan to place a building—you can save money in the long term and avoid some of the pain points of being a tenant.

Some of the merits of buying include:

  • Avoiding premium lease prices
  • Flexibility to make improvements to the site
  • Not having to share amenities like parking lots with other tenants
  • Not having to follow tenant rules that limit the effectiveness of your site
  • The opportunity to build equity
  • The ability to reduce your income taxes through depreciation

 

There are merits to leasing a site, too. These include:

  • Not having to spend a hefty dollar amount upfront to cover the costs of a commercial unit
  • Not having to work through zoning concerns, provided that a site is already zoned for commercial operations
  • Having the flexibility to choose a new site at the end of your lease without waiting for a buyer to acquire your current space
  • Not shouldering the responsibility for maintaining landscaping, parking lots, or external parts of your building

 

I’m interested in buying. What do I need to know?

Buying a property is a relatively straightforward process, provided you know how much you can afford to spend and your options for attaining financing.

Most franchise unit owners who purchase their property choose one of the following financing options:

 

SBA 7(a) loan

Many lenders offer small business loans that are backed by the U.S. Small Business Administration. Through these loans, franchise unit owners can attain up to 90 percent of the cost of their project and secure repayment terms of up to 25 years.

To learn more about SBA 7(a) loans, read our guide, Finance Your New Franchise with an SBA Loan.

 

CDC/SBA 504 loan

In a partnership with a certified development company (CDC), the SBA also offers 504 loans to cover the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, and the purchase of long-term machinery. Similar to a 7(a) loan, this option helps franchise unit owners attain up to 90 percent of the cost of their project and secure repayment terms of up to 20 years.

You can learn more about the 504 loan program here:

 

Commercial mortgage

Some lenders offer commercial loans for owners who plan to purchase an owner-occupied office building, retail center, warehouse, or other commercial property. These loans sometimes require higher down payments than SBA-backed options. They can also be slightly more difficult to attain.

Would you like to learn more about commercial mortgages? Check out our guide:

 

Commercial bridge loan

Some lenders offer short-term commercial bridge loans to owners who want to buy a commercial property and refinance it into a mortgage at a later date. Most commercial bridge loans offer terms between 6 and 36 months and require a down payment of at least 10 percent of the loan to value.

If this option is one you’d like to consider, read this article:

 

Commercial hard money loan

Some non-bank lenders offer commercial hard money loans that are secured by a borrower’s property. This short-term option allows owners to purchase commercial property quickly, with flexible terms, and often without checks on their credit history. However, the interest rate on these loans is usually high. Because of this, many borrowers view hard money loans as a last-resort option and refinance their loans into a mortgage at a later date.

If you are interested in this option, check out the online lenders that offer hard money loans or connect with friends, family members, or local real estate investors who are willing to provide this form of financing.

 

 

After you know what you can afford and your funding plans are in place, take the next step. Connect with a commercial real estate agent who knows your target area and can direct you to properties that meet your criteria.

Would you like to connect with a commercial real estate agent in your market? Click the Connect button below to get started:

Keep in mind that the site you select may need to be approved by your franchisor. Contact your franchise representative to learn about the process you’ll need to follow for site approval.

 

What do I need to know about leasing?

Compared to a real estate purchase, leasing requires far less money upfront. In many cases, you'll be responsible for a security deposit and possibly the first and last month’s payment, making this option much more feasible for cash-strapped new owners.

Lease contracts include a bevy of terms that you should read carefully. Some franchisors will offer to help you review your lease contract and may even negotiate it on your behalf. These services can be a big help. However, you should also hire an attorney who knows local laws and restrictions and is experienced in lease terms negotiation. With an attorney’s help, you may be able to save on common area maintenance fees, signage fees, or built-in rent increases; lift cumbersome restrictions and terms; and request improvements to the property at no cost to you.

 

 

Need an attorney to review your lease contract? Click the Connect button below to find an attorney in your area:

As with a real estate purchase, you’ll likely need to attain your franchisor’s approval for any site you select. Contact your franchise representative to learn about the process you’ll need to follow to attain site approval.

 

What’s next?

Once you decide whether to lease or buy real estate for your franchise, you can shift your focus to the other critical parts of your site selection process, including studying your territory, selecting a location, and making improvements to a site. We can help you with every step of this process. Log into your owner’s portal for expert advice, checklists, and articles that can help you start your franchise strong and ensure its long-term success.

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