Making the right investment decision about your office space and equipment is crucial, various options about ownership and leasing are examined here.

Most entrepreneurs, big or small, face this question during their business lives and are often stranded in their decision making path. As the parameters for deciding this are far too many, they would do well to consider various factors in their decision making either to buy, construct or lease.

As an entrepreneur, your requirements are pretty straightforward. You probably need a combination of closed offices and open space to house workstations, a cabin or two, a conference room , a reception area, a computer server room, and a kitchen/pantry area. While you could build this kind of office, it is the least practical option unless you have very specific needs.

If you really want to own a building, buying an existing property is a better, but an expensive option. The advantage is the time factor. You can identify, negotiate, sign up and quickly move into the new office building without losing a lot of time which in todays business directly translates to money. You also get depreciation benefits. On the downside, real estate prices are at an all-time high. Also, owning your own office building comes with a lot of additional work and upgradation/customisation expenses. You’ll have to deal with nuisances such as annual property taxes, and possible maintenance issues.

However, if you are looking for another revenue stream or already have building management experience, constructing your office building does have some perks. You can do whatever you like to the design and décor. You won’t have to worry about losing your space to a higher bidder every time your lease is up for renewal. And if the building is large enough, you’ll have room to grow your business. To save taxes, you can claim depreciation which is presently10% of the written down value, every year.

Some leases gives you the option to purchase the equipment for a nominal fee, sometimes one rupee.

But in most cases, leasing is the most practical and affordable option for a small business. A commercial real estate broker can help you locate available office space. But before you even start talking to one, you should calculate roughly how much space you’ll need. To get you started, private offices are 120 to 200 sq ft each, workstations are around 36 to 80 sq ft, and conference rooms for 10 to 12 people are around 200 to 375 sq ft.

It’s crucial to understand from the get-go that, practically and legally speaking, there are oceans of differences between commercial leases and operating leases. Commercial leases are not subject to most consumer protection laws that govern operating leases - for example, there are no caps on deposits or rules protecting a tenant’s privacy. Keep in mind that besides the amount of the rent, other less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your garment selling business to depend largely on walk-in customers, be sure that your lease establishes your right to put up a sign that’s visible from the street. And if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing to a competitor. Also remember, leasing property also attracts stamp duty in various states, at various rates if the lease is for beyond a certin minimum prescribed period. Make sure to understand the Stamp Act of the respective state and pay up the duty to avoid litigations and penalties later

Office Equipment And Funiture - Buy Or Lease

Most office equipment and furniture including computers, printers, photcopiers, modular work stations, office furniture etc are availbe for outright purchase or lease. Buying ensures that you are the owner of the asset right from day one and can use the asset the way you want to use it. Also if you are registered as an STPI or 100% EOU, then you get all concessions like cutoms duty exemption, excise duty exemption, sales tax exemption, for most of the capital equipment subject to certain conditions being fulfilled. This reduces the capital costs to a great extent and helps your cash flows immensly. Capital purchases in these cases need to be carefully planned and decisions taken sufficiently early so as to have sufficient time to import or buy these items after taking necessary approvals from concerned authorities which obviously takes time. But it is well worth it. Also an equipment or furniture once bought cannot be disposed off easily, especially if it is bonded under STPI / customs regulations.

To those for whom cash flow is very important during starting phases of their business, leasing the capital equipment does make sense. Before signing any lease, you’ll want to think carefully about which type of lease is best for you. Usually, when leasing office equipment, manufacturers or finance companies don’t refer to their leasing option plans by any industry-standard names, so you’ll have to carefully read the description of each lease to know exactly what you are getting into.

Basically, there are two types of leases: finance and true. The one that you pick will primarily depend upon what you expect to do with the equipment once the lease has expired. Finance leases, work best for companies that intend to keep the equipment at the end of the lease. The main advantage to this type of lease is that it gives you the option to purchase the equipment for a nominal fee, sometimes one rupee.

True lease, on the other hand, do not cover the full value of the equipment. At the end of the lease, you can choose to walk away from the equipment or purchase it at fair market value, which for office equipment usually translates to at least 10% of the original purchase price.

A true lease can let you fully claim lease payments for tax purposes while a finance lease can be regarded as an installment purchase plan and enables you to claim depreciation and write off finance charges based on ownership of the equipment. Before you sign any lease, make sure to discuss the tax implications with your accountant. The tax regulations have numerous exceptions for various styles of leasing that only a tax expert would know.

In addition, use vigilance when reading the fine print. Ask the lessor to explain any clauses that have sketchy wording. Check the contract to find out what penalties are incurred for making late payments or defaulting on a lease, or to see if there are any hidden fees. Since a lease is essentially a loan, you may have to pay a loan origination fee that could be around 3 to 5% of the cost of each equipment. Make sure that the end-of-lease terms and purchase price are in writing. Otherwise, you may find yourself at the end of your lease not being able to prove, for example, that you are entitled to a one rupee buyout.

The author heads Best Praktizes, a financial & statutory outsourcing firm. Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it \n This e-mail address is being protected from spam bots, you need JavaScript enabled to view it "

Issue BG53 Aug05

Related Items:

---

Be first to comment this article

Only registered users can write comments.
Please login or register.