Office Building | Owned vs Leasehold | Merits & Demerits

Office Building

Office Building - Owned vs Leasehold
Office Building – Owned vs Leasehold

Once the location for an office has been finalized, it would become necessary to select space or building to house the office. The problem of getting proper and suitable building is as complicated as that of the problem of selecting the right location for an office.

The office building should be in proper size, and shape should be capable of serving the particular needs of the enterprise. But it is often very difficult to procure a building, which is best suited to the organization. Therefore, the management must decide whether it should own the office building or to rent it i.e. to lease it.

1. Owned Building

Freehold building or owned building has several points to its credit. The important merits of freehold building are:

1. It enhances prestige and adds credit worthiness to the organization.

2. It provides permanence and the address need not be changed. This will facilitate the customers to a considerable extent.

3. In a growing industrial economy, own building represents a sound investment decision.

4. It can bring additional revenue if the space available is more than enough and can be let out to others.

Drawbacks of Owned Building for office

But the main drawbacks are

1. Huge investment, and

2. High maintenance costs.

Hence, small firms cannot afford to have a freehold building. Even if the management decides to house the office in owned building, it should also decide whether it should buy an existing building or construct its own office building. These two propositions also have their merits and demerits. They are discussed below.

1. Purchasing an Existing Building

If prompt occupation is needed, it is advisable to buy a constructor building and renovate it to meet the requirements of the office. It is also considered as a wise decision if it is viewed from the point of view of cost.

Construction of a new building for office is really a difficult task and the expenses connected with constructions are excessively high. However, this is possible only when the office requirements do not call for any special type of building with certain specifications.

2. Construction of a New Building

The nature of the office work, the nature and type of the machines used in the office etc. may call for certain special facilities. In those circumstances, the only way open to the management is to construct a new building with suitable amenities and other facilities. When it is decided to construct the building, it should be planned and designed to fit the exact requirements of the organization.

Generally, the tendency prevailing among the management is to construct a bigger area than is required to meet the immediate needs, so that there may be further scope for future expansion. If there is further space after providing for expansion also, the surplus area may be rented to provide a steady income.

However, the management can resort to construct its own office building only when the following conditions prevail.

1. The business should have grown large and well established.

2. The business firm must have enough surplus liquid cash.

3. The demand for the product or the services of the business enterprise should be of a relatively stable character.

4. There should be a cost advantage.

5. The building needed to house the office requires some special facilities, which cannot be provided in any other existing buildings.

In both the cases, the financial burden i.e. the expenditure involved shall be the deciding factor.

2. Leasehold Building

Small and even medium sized enterprises cannot afford to bear the cost of constructing or buying a separate building to house their office. Hence the most popular as well as viable alternative is to hire a building on rental basis.

Even large concerns, do prefer this due to various reasons. Particularly when the firm is not able to buy premises in a particular area, even if it has enough liquid cash, it can only hire a building.

Merits of Leasehold Building for office

The leasehold or hired building has an edge over owned building in the following manner:

1. No investment is required. Therefore, unnecessary locking up of capital can be avoided.

2. Recurring expenditure is minimized.

3. Funds can be efficiently put to use.

4. The office location can be changed whenever circumstances demand so. Thus, there is greater flexibility in terms of location.

Demerits of Leasehold Building

1. The leased building is generally constructed not on the basis of the needs and requirements of the lessee. Hence the layout process may present with its own problems.

2. Since the building is not constructed on the basis of the needs of the firm some space may go waste or remain unutilised in the process of lay-out.

3. Rents are generally high. This factor creates a permanent burden on the firms situated in the metropolitan cities. Consequently, operating costs shall also increase.

4. When the lease period expires, the tenant has to shift the office to some other place, if the building owner is not prepared to renew the lease. This will cause much inconvenience to the firm as well as to the customers.

In spite of these marked limitations, small firms can opt for only rented building. Even today established business concerns are housed in rented buildings. Thus, it is clear that rented accommodation is the only practical via media under all circumstances.