Choosing Between Leasing and Owning for Your Child Care Business

By Chris Binkley, Headwaters Capital, LLC, Program Mentor

Originally published on July 1, 2024 (www.childcareaccelerate.com)

In the ever-evolving landscape of child care businesses, the pivotal decision of whether to lease or own space for facilities stands as a critical choice for owners. While the importance of identifying an ideal location resonates across all businesses, child care facilities face unique challenges, necessitating a meticulous evaluation of factors ranging from safety measures to outdoor play areas. In this in-depth exploration, we delve into the multifaceted considerations that child care business owners should carefully weigh to make informed decisions tailored to their specific situations.

Leasing Benefits

Leasing unfolds a myriad of advantages for child care businesses, profoundly influencing their day-to-day operations and long-term prospects. The standout benefit lies in the lower upfront costs associated with leasing, eliminating the need for a mortgage or construction management and substantially reducing capital requirements. Fixed rent payments and estimated common area maintenance costs offer a simplified budgeting process, instilling predictability into facilities expenses. The accelerated startup time linked with leasing facilitates a quicker launch, allowing child care facilities to become operational without the delays often tied to construction or property acquisition.

Flexibility emerges as a key asset when opting for leasing. Short-term lease commitments empower child care businesses to experiment with different locations and adapt to changing needs without the weight of a permanent commitment. Leased spaces often come equipped with basic infrastructure, streamlining the customization process for child care use and providing a foundation for adaptation.

Leasing Drawbacks

While leasing opens doors to flexibility and reduced upfront costs, it comes with its set of considerations that child care businesses must carefully weigh. A notable limitation is the lack of complete control over the leased space. Tenants may find themselves constrained in making layout adjustments, designs, or even necessary renovations, prompting collaboration and negotiation with property owners. Modifying space for child care users is often costly and will not go with the tenant if they vacate the space.

The potential for annual rental payment increases and the absence of equity building over time are additional factors to ponder. Leases may incorporate escalating rent clauses, leading to higher costs over time, and property owners are not obligated to renew leases, introducing a layer of uncertainty into the equation. Unlike property ownership, rent payments do not contribute to building equity, leaving tenants without a stake in potential property value appreciation over time.

Ownership Benefits

Owning commercial space unfolds as an enticing option for child care businesses, offering a suite of advantages that can significantly contribute to their long-term success. The allure of complete control over space usage, design, and potential expansions allows property owners to tailor the environment to precisely meet the needs of their child care facility. Equity build-up through loan amortization and the potential for property values to appreciate over time add substantial financial benefits to the ownership equation.

Property owners can diversify revenue streams by exploring multi-tenant properties, unlocking alternative rental income and potential business benefits. The ownership of an investment asset introduces an additional layer of financial security, aligning seamlessly with the long-term goals of many child care business owners seeking stability and growth.

Ownership Drawbacks

While ownership presents a compelling array of benefits, it is not without its set of challenges that child care businesses must confront. The significant initial capital outlay encompasses expenses such as land purchase, construction or renovation costs, financing fees, and potential delays. Long-term commitments limit flexibility, placing sole responsibility on property owners for maintenance, legal compliance, health and safety oversight, and exposure to market risks.

Irregular maintenance expenses pose a distinct challenge for property owners. Unlike leased spaces, where maintenance costs are often included in agreements, property owners bear the responsibility of handling maintenance issues as they arise. This requires a proactive approach and financial planning to address unforeseen repairs, ensuring the facility remains safe and compliant with regulations.

Facility and asset management responsibilities are another facet that property owners must navigate. While owning provides control over space usage, it also entails overseeing day-to-day operations, managing staff, and ensuring the facility meets regulatory standards. This increased responsibility demands a commitment of time and resources to maintain a high standard of care and safety.

Exposure to market risks is an inherent aspect of property ownership. Fluctuations in the real estate market can impact property values, potentially affecting the overall financial health of the child care business. Property owners need to stay vigilant, staying informed about market trends and making strategic decisions to mitigate potential risks.

In navigating the space dilemma, the choice between leasing and owning for a child care business involves a nuanced evaluation of trade-offs. There is no one-size-fits-all answer, and each business owner must carefully assess their long-term goals and personal aspirations to create a practical plan for their ideal facility. By delving into the nuanced aspects of leasing and ownership, child care business owners can make informed decisions that align with their vision for the future, fostering a thriving and secure environment for the children they serve. If it would serve you well to discuss your situation with a commercial real estate expert, please feel free to reach out to Chris Binkley for further consultation.

Sources:

Advantages & Disadvantages of Leasing & Owning Commercial Property (menlocre.com)

Hoban, M. (2023). To Lease or Not To Lease. Society of Industrial and Office Realtors. 2023, https://www.sior.com/education-and-insights/insights/magazine/sior-report-article/fall-2023/to-lease-or-not-to-lease

Miller, M. (2023). Buying vs leasing commercial real estate: Pros and cons of Each. Value Penguin. https://www.valuepenguin.com/small-business/buying-vs-leasing-commercial-real-estate

About the Author

Chris Binkley, the Principal Consultant at Headwaters Capital and Director of Strategic Capital at AMG, specializes in guiding individuals and business owners through strategic capital deployment in commercial real estate ventures. With a wealth of expertise in commercial real estate, Chris provides invaluable advice to clients who are seeking to buy, sell or lease CRE property, empowering them to navigate complex real estate matters with confidence. For further information, please visit www.headwaterscap.com or reach out to Chris at chris@headwaterscap.com.

Child Care Accelerate is an innovative business support program designed to help child care providers optimize their business operations in two months. Our customized coaching journey allows us to partner with providers on their self-identified goals and priorities and share tools to improve their operational efficiency, build financial capacity and sustain a competitive edge. To learn more about Child Care Accelerate, please email info@seedconsults.com.