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Comparative Analysis of Costs: Rent
vs. Buy
Courtesy of the Nonprofit Finance Fund
Your search for space may lead you to a few suitable properties that merit closer analysis. Before you decide whether to rent or buy, you may want to weigh their costs and benefits in a systematic fashion to determine which space is best. Most costs and some benefits are quantifiable, and can be analyzed mathematically. Others are not, and should be considered separately, in light of what you learn from your calculations.
What follows is a sample analysis to be used as a model for your own analysis.
The sample is preceded by a list of assumptions. Be sure
to check your own assumptions carefully before you consider
your analysis complete.
| CHARACTERISTICS |
RENTING |
BUYING |
| Optimum Program Fit |
Evolving, Changing |
Stable, Fixed |
| Up Front Costs |
Low |
High |
| Operating Costs |
Similar
|
| Project Complexity |
Lower |
Higher |
| Project Duration |
Shorter |
Longer |
| Financial Controls Required |
Minimal |
Extensive |
| Financial Strength Required |
Minimal |
Substantial |
| Effect on Cost Structure |
Occupancy costs will
be more variable |
Occupancy costs will
be fixed. Repair bills can be large and unexpected. |
RENT OR BUY?
Nonprofit agency needs 10,000 square feet of office space.
| Rental cost: |
$15 per square foot, or |
$150,000 per year |
| Purchase price: |
$90 per square foot, or |
$900,000* |
* Seventy percent of the purchase price, or $630,000 can be financed through a loan at 9 percent for 10 years.
UPFRONT COSTS
|
RENT |
BUY |
| Legal |
$5,000 |
$10,000 |
| Appraisal |
|
$2,000 |
| Survey |
|
$1,000 |
| Title Insurance |
|
$5,000 |
| Environmental Survey |
|
$8,000 |
| Bank's Legal Expenses |
|
$15,000 |
| Mortgage Recording Tax |
|
$10,000 |
| Bank's Transaction Fee |
|
$9,000 |
| Subtotal, Transaction |
$5,000 |
$60,000 |
| Down Payment |
|
$270,000 |
| Site Improvements* |
$300,000 |
$500,000 |
| Security Deposits |
$25,000 |
|
| Subtotal, Capital |
$325,000 |
$770,000 |
| Total Upfront Costs |
$330,000 |
$830,000 |
ANNUAL ONGOING COSTS
|
RENT |
BUY |
| Rent |
$150,000 |
|
| Debt Repayment** |
|
$100,000 |
| Cost of Upfront Cash |
$17,000 |
$50,000 |
| Ongoing Upkeep*** |
|
$55,000 |
| Total Annual Ongoing Costs |
$167,000 |
$205,000 |
* Site Improvements: For renters, landlord may pay for these; owners will likely pay between $50 and $80/ square foot (between $500,000 and $800,000 for 10,000 sq. ft.)
** Financing of $630,000 (70 percent of purchase price) for 10 years at 9 percent interest.
*** Rule of thumb for moderate upkeep about $5.50 per foot, or $55,000 per year.
Source: Thomas B. Harris
© 2000 by the NONPROFIT
FINANCE FUND
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