Purchasing an Office

Is it time to purchase your office?

By: Robert S. Williams, Esq.

Many doctors, lawyers, engineers, insurance brokers and other service professionals spend a large part of their monthly revenue renting office space. There are significant economic and tax benefits for owning your own office space, and, coupled with the recent decline in real estate values, now may be the best time to consider purchasing and owning your own office. Consider the following balance sheet and profit & loss statement of an average renter of office space:

Balance Sheet:

Assets:

Cash..............................$200,000

Accounts Receivable.............35,000

Furniture & Equipment...........40,000

Total Assets.....................$275,000

Liabilities:

Accounts Payable.................25,000

Capital.............................$250,000

Total Liabilities and Capital..$275,000

Profit & Loss:

Revenues.......................$1,200,000

Rent....................................38,520

Payroll................................700,000

Other expenses......................75,000

Depreciation............................5,714

Net Profit...........................$380,766

As you can see from the financial statements, the business has a net book value of about $250,000, and generates a net cash flow each year of about $386,480 ($380,766 net profit plus the depreciation deduction of $5,714). Depreciation is an allowable expense for computing your taxable income, but does not require you to fund this deduction by actually spending cash each year. This is an important concept for you to consider when deciding whether or not to purchase your office. Consider the following balance sheet and profit & loss statement of a similarly situated owner of their own office:

Balance Sheet:

Assets:

Cash.................................$65,000

Accounts Receivable.............35,000

Furniture & Equipment...........40,000

Land & Building..................450,000

Total Assets......................$590,000

Liabilities:

Accounts Payable.................25,000

Loan Payable.....................311,800

Capital.............................$253,200

Total Liabilities and Capital..$590,000

Profit & Loss:

Revenues.......................$1,200,000

Interest................................21,949

Real Estate Taxes...................6,000

Insurance..............................4,000

Payroll...............................700,000

Other expenses.....................75,000

Depreciation.........................16,099

Net Profit..........................$376,952

As you can see from the financial statements, the business has a net book value of about $253,200 (after one year of office ownership), and generates a net cash flow each year of about $389,851 ($376,952 net profit plus the depreciation deduction of $16,099 less the principal payments on the mortgage of $3,200, which are not tax deductible). You need to consider the potential maintenance costs in your analysis as well. However, note that economically the business now owns its office and each monthly mortgage payment increases the business' equity in the building. The monthly rent payment never resulted in any equity for the renter. For income tax purposes, the business also gets to claim a depreciation deduction of about $10,385 each year for the building.

You definitely need to get out your pencil, and run the numbers, but given the price of real estate now is the time to consider purchasing your office. From a practical standpoint, you need to make sure that you consider all the costs of owning the real estate, including maintenance costs. Also, you need to be aware of the capital markets. Most banks are only willing to loan on about 70% of the value of commercial property. So you will need the 30% down payment. Nevertheless, if you can swing the down payment, you should consider the financial impact to your business and its operations if you purchase and own your office space.