With the Right Planning, Tenants Can
Pay for Your Office Space
In the previous issue of Trak Record, we featured an article on how owning office space can offer significant advantages over leasing. These advantages multiply for building owners who lease out part of their
building. ConTrak has helped many business owners improve their cash flow and long-term financial position by building custom office space with room for expansion for their own business and for renting out space to
other tenants.
Take the example of doctors who are just getting started in practice. Leasing office space has the following disadvantages:
- Tenants receive nothing in exchange for payments but the right to conduct business in that location.
- At the end of each lease term, rent increases are likely.
- The practice may soon outgrow the space initially
leased.
- Each time the practice moves, it loses money invested in tenant improvements and causes inconvenience to patients.
Instead, a group of doctors could start out by investing in their own office building, following this strategy:
- With a need for 5,000 square feet initially, but a plan to triple the practice within 10 years, they contract to build a 15,000- square-foot building.
- The group pays cash for a piece of property in an optimal location, and then uses the land as collateral on a construction loan.
- Once construction is finished, the practice obtains permanent financing for the property, opens its own practice with 5,000 square feet, and leases the remaining 10,000 to other tenants.
- Tenant lease payments help to offset the doctors’ own office expenses, and depreciation deductions defer taxes.
- Over time, the building appreciates in value, and rents increase.
- As the practice grows and leases expire, the doctors move into more of the building.
- Eventually, the practice occupies the whole building, and the building pays for itself – perhaps several times over.
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