How I Evaluate Real Estate Leases Versus Ownership in Acquisitions
When I buy a business, one of the most consequential decisions I study is whether the company leases or owns the real estate it operates from. Over time, I’ve learned that real estate strategy directly affects valuation, cash flow, and long-term flexibility. For some businesses, owning the property provides stability and appreciation. For others, leasing creates agility and capital efficiency. Knowing which model makes sense is one of the keys to structuring the right deal.
Why Real Estate Structure Matters
It matters because it:
- Defines operating costs for years ahead
- Shapes risk exposure to landlords or market swings
- Influences working capital and debt capacity
- Affects scalability when expanding locations
- Impacts valuation since buyers must assume real estate obligations
Whether a company leases or owns, I want to know how it supports or hinders the business model.
My Early Mistakes
In one acquisition, I ignored the risk of a short-term lease. When the landlord doubled the rent at renewal, margins collapsed.
In another case, I bought a company that owned its property but had tied up too much capital in real estate. Growth stalled because cash was locked into the building instead of expansion.
Both mistakes taught me to analyze real estate as carefully as I analyze financials.
How I Evaluate Leases
- Lease term and renewal options
- Rent relative to market rates
- Assignment rights during ownership changes
- Escalation clauses and hidden costs like CAM charges
- Landlord reputation and relationship with the seller
How I Evaluate Ownership
- Property value relative to business cash flow
- Debt terms and impact on leverage
- Opportunity for appreciation or resale
- Liquidity tradeoffs of owning versus leasing
- Tax and depreciation benefits
How I Decide Lease vs. Own
- For location-sensitive businesses like restaurants or retail, long-term leases can be risky if markets shift. Ownership may provide more control.
- For businesses requiring capital flexibility, leasing is often smarter.
- In some cases, splitting ownership, having the seller retain property, and the buyer lease, can balance risk.
Final Thoughts
I’ve learned that real estate is never an afterthought in acquisitions. It’s a strategic decision that defines flexibility, cost structure, and risk.
That’s why I always analyze leases and ownership side by side before closing.
I continue sharing my acquisition frameworks at DrConnorRobertson.com, where I explain how I approach hidden decisions like real estate structures.