A climbing wall is designed around one principle: every hold must support the next move. Your facility decision works the same way. The right building supports your cash flow, operations, and growth plan. The wrong one can tie up capital for a decade.
Should your manufacturing company buy its building or keep leasing?
There is no universal answer. The decision depends on rent, financing, space requirements, operating costs, expected hold period, and the value of the capital you commit. A 10-year comparison makes those tradeoffs visible.
This article uses a typical manufacturer as the example. It is clearly hypothetical, educational, and framed as of 2026: not a recommendation, forecast, quote, or guarantee.
1. Start with the space you actually need
The first cost-saving opportunity may be hidden in your current footprint.
In this hypothetical scenario, a typical manufacturer currently leases 22,000 square feet at $1.00 per square foot. The existing lease is ending, and the company realistically needs approximately 14,000 square feet for production, storage, shipping, and office support.
Renewing or relocating at an illustrative market rate of $1.70 per square foot changes the economics quickly:
- Current footprint: 22,000 square feet
- Actual expected need: approximately 14,000 square feet
- Illustrative new lease rate: $1.70 per square foot
- Lease term modeled: 10 years
- Illustrative annual rent escalation: 3%
The company is not choosing between an old $1.00 lease and a $4.4 million building. That comparison is outdated. It is choosing between a smaller leased manufacturing space at a higher market rate and an owner-occupied facility that could provide long-term control and equity.
That distinction matters. Before you compare financing, compare usable capacity.
Action plan:
- Separate essential production space from unused or underused space.
- Forecast headcount, equipment, inventory flow, loading needs, and customer requirements for the next 5–10 years.
- Measure the cost of excess square footage.
- Identify whether your operation can function efficiently in 12,000–14,000 square feet.
- Include expansion options in both the lease and purchase scenarios.
2. The 10-year lease path
Under the hypothetical lease scenario, the manufacturer leases 14,000 square feet at $1.70 per square foot.
The starting annual occupancy cost is:
| Lease calculation | Illustrative amount |
|---|---|
| Base rent: 14,000 square feet × $1.70 × 12 months | $285,600 per year |
| NNN charges: property taxes, insurance, and CAM | approximately $111,000 per year |
| Total Year 1 occupancy cost | approximately $396,600 |
| Assumed annual escalation on rent and NNN | 3% |
| Approximate 10-year lease cost | $4.55 million |
| Ownership stake after 10 years | $0 |
This version compares apples to apples. The lease path includes NNN costs, and the buy path includes the owner-paid equivalent of property taxes, insurance, and maintenance.
The approximately $4.55 million figure is based on the supplied hypothetical assumptions. It includes base rent plus estimated NNN charges only. Depending on the lease structure, the company may also pay utilities, repairs inside the premises, tenant improvements, moving costs, or other charges.
At the end of the 10-year period, the renter has paid for occupancy but does not own the building. That is not automatically a disadvantage. Leasing may preserve capital, provide flexibility, and reduce responsibility for major building systems.
Leasing can be strategically attractive when your manufacturing footprint may change. A growing operation may need more loading area, power capacity, or warehouse depth. A lease can make it easier to relocate without selling a property.
But rent and NNN increases create a recurring exposure. A 3% annual escalation seems manageable in one year. Over a decade, it materially changes the total cash requirement.
Habit to build: Review your total occupancy cost annually as a percentage of revenue and operating cash flow: not just as a monthly payment.
3. The 10-year buy path
The alternative in this example is a $4.4 million manufacturing facility of approximately 12,000–14,000 square feet, financed through an SBA 504 structure the owner wants to explore.
As of 2026, SBA 504 loans generally use a three-party structure: a bank or other senior lender for up to 50% of project cost, a CDC debenture for up to 40%, and borrower equity of at least 10%. Applications go through Certified Development Companies, or CDCs. For manufacturing, green energy, and certain public-policy projects, the maximum CDC debenture can reach $5.5 million. SBA guidance also requires owner occupancy: at least 51% of an existing building or 60% of new construction. Working capital and inventory are not eligible uses, and speculative or rental-real-estate investing is not the purpose of the program.
The 10% equity contribution is the minimum for an established business buying owner-occupied property. Startups and special-purpose properties may require 15%–20%. Program terms can change and may vary by lender and CDC.
The illustrative assumptions below are hypothetical only. They are not loan quotes, approvals, or guarantees:
| Purchase assumption | Illustrative amount |
|---|---|
| Purchase price | $4.40 million |
| SBA senior bank loan at 50% | $2.20 million |
| SBA CDC debenture at 40% | $1.76 million |
| Seller financing at 5% | $220,000 |
| Buyer cash injection at 5% | $220,000 |
| Illustrative bank rate | approximately 6% |
| Illustrative CDC fixed rate | approximately 6% |
| Illustrative seller-note rate | approximately 4% |
| Illustrative amortization | 25 years bank and CDC; 10 years seller note |
| Approximate annual debt service | approximately $333,000 |
| Property taxes | approximately $55,000 per year |
| Insurance | approximately $12,000 per year |
| Maintenance reserve | approximately $44,000 per year |
| Ongoing annual cost excluding closing injection | approximately $444,000 |
| Approximate Year 1 cash out including buyer injection | approximately $664,000 |
SBA 504 repayment terms are commonly 10, 20, or 25 years, and the CDC debenture rate is fixed and tied to an increment above the 10-year U.S. Treasury. This model uses approximately 6% fixed rates for both the bank piece and the CDC piece, plus an illustrative 4% seller note, as simplified assumptions. That is useful for comparison. These are not market quotes.
The approximate annual debt service here is roughly $333,000: about $170,000 for the bank loan, about $136,000 for the CDC debenture, and about $27,000 for the seller note. On top of that, the owner pays the NNN-equivalent costs directly: approximately $55,000 in property taxes, $12,000 in insurance, and $44,000 in maintenance, for about $111,000 per year.
That creates an ongoing annual cost of approximately $444,000, plus the buyer's initial $220,000 injection at closing. Comparing apples to apples matters. Both paths now carry property taxes, insurance, and maintenance or CAM, so the comparison is consistent.
Important SBA equity caveat: SBA 504 generally requires at least 10% borrower equity for owner-occupied purchases. Seller financing counts toward equity only under strict conditions: the seller note must be no more than 50% of the required equity injection, fully subordinated, and placed on full standby for the entire life of the 504 loan under a Standby Creditor's Agreement. In this hypothetical, the $220,000 seller note equals exactly 50% of the $440,000 minimum equity requirement, which is the cap. But a 10-year amortizing seller note with payments generally does not qualify as equity under SBA rules. If the seller note does not qualify, the buyer would need to inject the full $440,000 in cash, which changes the model's cash-out. Confirm the structure with your CDC and lender before relying on any scenario.
Debt service includes principal repayment. Principal repayment reduces the outstanding loan balance and builds equity in the property. Rent does not create an ownership stake.
Over 10 years, the illustrative purchase scenario produces:
| Buy-path measure | Illustrative amount |
|---|---|
| Total cash out over 10 years, including buyer injection | approximately $4.66 million |
| Historical-reference building value after 10 years at approximately 4% annual appreciation | approximately $6.51 million |
| Estimated combined loan balance after 10 years | approximately $3.02 million |
| Estimated owner equity after 10 years | approximately $3.49 million |
| Approximate net cost after subtracting equity | approximately $1.17 million |
If the manufacturer uses the building for the full hold period and the property appreciates in line with the modeled historical-reference rate, ownership can look materially stronger on a net basis. If those conditions change, the result changes with them.
An LOI, purchase contract, title work, zoning review, and SBA/CDC loan documents require review by a qualified attorney, lender, and CDC team. LunaSi does not provide legal advice, loan brokerage, or investment advice.
4. Why appreciation and hold period change the result
The purchase scenario appears significantly stronger when the building appreciates at a rate informed by long-term history.
As a historical reference, over the roughly 30-year period from 1996 to 2025, the U.S. Bureau of Economic Analysis chain-type price index for warehouse structures, FRED series W038RG3A086NBEA, increased from 48.5 to 159.8. That works out to an annualized increase of approximately 4.1% per year. This article uses approximately 4% annual appreciation as a historical-reference assumption in the base case. It is not a forecast or guarantee.
That result still depends heavily on two factors:
- The manufacturer remains in the building for the full 10-year period.
- The property reaches the assumed future value.
Using the approximately 4% historical-reference assumption, the model estimates a future building value of approximately $6.51 million after 10 years. Subtracting the estimated combined loan balance of approximately $3.02 million creates approximately $3.49 million in equity.
The net cost is then calculated as:
approximately $4.66 million in total cash out − approximately $3.49 million in estimated equity = approximately $1.17 million
Now remove the appreciation assumption.
At 0% appreciation:
- Building value after 10 years: approximately $4.40 million
- Estimated combined loan balance after 10 years: approximately $3.02 million
- Owner equity: approximately $1.38 million
- Net cost: approximately $3.28 million
That result is roughly parity with the lease path in this simplified example.
The conclusion is important: buying does not automatically win. The outcome hinges on appreciation, transaction costs, financing terms, operating expenses, the seller-note treatment, and the time you remain in the property.
A manufacturer that sells after three years may not have enough time to recover the cash injection, closing costs, financing costs, and potential market volatility. A manufacturer that stays for 10 years may have more time to build equity and benefit from rent avoidance.
Stress-test your model at minimum with:
- 0% appreciation
- Approximately 4% annual appreciation as a historical reference
- Higher maintenance costs
- A higher interest rate
- A full $440,000 buyer injection if the seller note does not qualify toward equity
- A shorter five-year hold period
- A delayed sale or refinance
- Lower-than-expected business growth
5. What this model does not include
This comparison is a decision aid: not a complete financial analysis.
The simplified illustration does not include:
- Vacancy or subleasing risk
- Leasehold improvements or tenant-improvement allowances
- Major capital repairs, such as roof, HVAC, paving, or structural work
- The opportunity cost of the $220,000 buyer injection
- Inflation affecting property taxes, insurance, and maintenance
- Loan fees, CDC fees, appraisal costs, or lender charges
- Transaction, legal, title, inspection, environmental, or closing costs
- Selling costs at the end of the 10-year period
- Potential balloon payments or refinancing risk
- Utilities, security, janitorial services, and other occupancy expenses
- The tax impact of either scenario
Ownership may create tax items involving depreciation, mortgage interest, property taxes, repairs, and the allocation of land versus building value. Lease payments and ownership costs may also affect taxable income differently. Those implications depend on your facts and require review by your CPA or other qualified tax professional.
Ask your CPA to review the tax implications before you sign. Focus on depreciation, mortgage interest, property taxes, repairs, and the land-versus-building allocation. Those items can materially affect after-tax results.
The financial statement treatment also requires attention. A lease may create balance-sheet reporting considerations, while ownership adds a building asset, loan liability, depreciation, and interest expense. Your accountant may want to review how either path affects lender covenants, liquidity, profitability metrics, and management reporting.
Ownership provides control over the property and can reduce exposure to lease renewal decisions. It also ties up capital and adds maintenance and management responsibilities.
Leasing provides flexibility and may preserve cash for hiring, equipment, process improvements, marketing, or debt reduction. It also exposes the business to rent increases and leaves it without property equity.
The best answer fits the business: not just the spreadsheet.
6. What Business Owners Should Do Now
Start with a side-by-side model using your actual numbers.
Gather the lease inputs:
- Proposed rent and escalation schedule
- Common-area maintenance and other pass-through costs
- Renewal options and notice requirements
- Tenant-improvement allowances
- Relocation and moving costs
- Expected space requirements over 5–10 years
Gather the purchase inputs:
- Purchase price and comparable property values
- Required buyer cash injection
- Bank, CDC, and potential seller-note structure
- Amortization, maturity, and any refinance risk
- Property taxes, insurance, and maintenance
- Utilities and operating costs
- Expected loan, CDC, closing, and transaction costs
- Owner-occupancy compliance for the space you plan to use
- Whether any seller financing would qualify under SBA standby and subordination rules
Then model three views:
- Total cash paid
- Annual operating cash flow impact
- Equity or residual value at the end of the holding period
Do not compare only monthly rent with monthly debt service. Include NNN or NNN-equivalent costs on both sides. Separate loan principal from interest, identify the remaining loan balance, and show what happens if the property does not appreciate.
Can this be financed through SBA 504? Ask early. Applications go through Certified Development Companies, and terms can vary by lender, CDC, project type, occupancy, borrower profile, and the treatment of any seller note.
Review purchase contracts, title work, zoning, and SBA/CDC documents with your attorney, lender, and CDC. Review tax implications with your CPA, especially depreciation, mortgage interest, property taxes, repairs, and land-versus-building allocation. LunaSi Accounting, LLC can help you organize the inputs, build the financial model, analyze cash flow, and keep your books accurate through a major facility decision. That support is practical — not legal, tax, or investment advice. Learn more about LunaSi’s accounting services or contact LunaSi to discuss financial modeling, cash flow analysis, and bookkeeping support.
Getting Started
Choose one decision horizon: five years and 10 years are useful starting points — and build both scenarios using conservative assumptions. Start small, stress-test one facility option, then add more variables over time. By the end of a quarter, you want a decision model that is fast, reliable, and strategic.
This content is for general informational and educational purposes only, reflects a hypothetical as-of-2026 example, and is not legal, tax, accounting, lending, or investment advice. SBA 504 program terms can change and may vary by lender and CDC. Illustrative rates such as approximately 6% and 4% are assumptions only, not quotes. Historical appreciation references are not forecasts or guarantees of future value. Consult your CPA for tax implications, and consult your attorney, lender, and CDC regarding contracts, title, zoning, financing terms, seller-note treatment, and SBA documentation. LunaSi Accounting, LLC is an accounting and bookkeeping firm and does not provide legal services or act as a law firm.
31.08.2026