Article
Pros and cons for restaurants buying and leasing commercial real estate
March 27, 2023 · Authored by Brock R. Yates
When opening a new restaurant concept or location, one of the first decisions restaurant owners will make is whether to buy or lease the property. The choice restaurant operators land on will have tax ramifications down the road. Here are some pros and cons to consider before leasing or buying.
Pros to leasing
Flexibility and adjustability
Not being the property owner affords restaurant operators more flexibility. Depending on the terms of your lease, if you find the location isn’t optimal for your business plan, moving to a different location is easier. If you find your lease terms unmanageable, you can renegotiate.
Minimal upfront cash layout
With leasing, there are no down payments, freeing up cash for renovations and investments. Your costs are stable and predictable.
Lease tax deductions
When you rent, you can deduct your lease payments. If your restaurant signed a triple net lease (meaning the property owner pays the mortgage and you pay everything else), you are paying the property taxes, utilities and other bills. Those payments are also deductible.
Qualified improvement property (QIP) for leases
When you are leasing and pay out of pocket for tenant improvements, if those improvements are on a 15-year property, you can deduct the QIP improvements over 15 years. Also, because the space is a 15-year property, it is eligible for bonus depreciation. You could theoretically expense most or nearly all tenant improvements in the year they are placed into service.
However, there’s a catch. If the property owner pays for these improvements, they reap the tax rewards, not you. The property owner is providing the funds to make improvements, so you can’t take a tax deduction on those expenditures.
Cons to leasing
Not owning the land and buildings your restaurant is built on can put you at a disadvantage. As a lessor, you are at the whim of the property manager. If they decide to sell, that could be a problem. If there are issues with the building itself, like repairs, and the property owner is not responsive, it can be difficult to resolve the problem quickly.
