Buy vs lease analysis: what the books need

A buy vs lease analysis for a small business is decided on cash and risk over 36 months first, and on tax second. The firm needs four things from the books to do it: a cash forecast extended from 13 weeks to three years, a balance sheet the lender will believe, the existing debt schedule from the loan sub-ledger, and the tax layer: depreciation on the building, interest, and the restored 100 percent bonus depreciation and Section 179 on the fit-out. If the books close monthly, all four exist. The analysis is the framework applied to numbers the firm already keeps.

We run an accounting firm, and "should I buy the building?" is the question that most reliably arrives in October, when the lease renewal lands and the owner has just seen a good year. Here's how we answer it, and why the tax software's answer is usually the wrong one.

Why tax software answers the wrong question

Run the numbers through a tax projection and buying wins nearly every time: depreciation on the building over 39 years, interest deductible, and the improvements expensed under Section 179 or the 100 percent bonus depreciation that was restored for property acquired after January 19, 2025. The projection shows a lower tax bill in year one and the owner hears "buy."

The projection is right about tax and silent about everything else. It doesn't know that the down payment is the working capital the business runs on. It doesn't know the roof is twelve years old. It doesn't know the business already carries an equipment note and a line of credit that a new mortgage will crowd. And it doesn't know that in three years the business might need twice the space, or half.

Tax is real money and it belongs in the analysis. It's the second layer, applied after the cash and the balance sheet say the deal is survivable.

Extending the 13-week forecast to 36 months

The 13-week cash flow forecast most advisory clients already get is the starting point. Buy versus lease stretches it to 36 months, monthly rather than weekly, with two scenarios side by side.

Lease scenario. Rent at the renewal rate with the escalations in the proposed lease, CAM and taxes as passed through, the tenant improvements the landlord won't cover, and the moving cost if the renewal is elsewhere.

Buy scenario. The down payment out in month zero. Closing costs. The mortgage payment from the lender's term sheet, principal and interest. Property taxes and insurance the landlord used to carry. Maintenance and capital reserves, which owners underestimate; a percentage of building value per year set aside for the roof and the HVAC is honest. The fit-out, whether financed or cash. Any rent received if part of the building is leased to a tenant.

Both scenarios sit on top of the same operating cash flow from the business, and the row that matters is the cushion: ending cash each month against the minimum the owner set. A buy scenario where the cushion goes negative in month four, when the fit-out invoices land and the first quarter's taxes are due, is a deal that needs a bigger loan, a smaller building, or a later date, no matter what the tax projection says.

The 36-month view also shows the crossover: the month where owning becomes cheaper on cash than leasing, if it ever does inside the horizon. For many small businesses it's beyond three years, which is fine if the owner plans to be there in year ten and a problem if they don't.

The lender's balance sheet and debt capacity

The lender will read the balance sheet before quoting terms, and the balance sheet has to be one the firm would sign. That means loans tied to lender statements, owner draws separated from expenses, Undeposited Funds at zero, intercompany balances that match on both sides, and fixed assets with real depreciation. A lender who finds a $40,000 loan balance that doesn't match their own records stops trusting the rest.

From the balance sheet and the P&L the lender computes debt service coverage: operating cash flow available for debt divided by total annual debt payments, with the new mortgage included. Most commercial lenders want a coverage ratio comfortably above one, and the exact threshold is theirs to state. The firm's job is to compute it in advance with the existing notes from the loan sub-ledger plus the proposed mortgage, so the owner knows before applying whether the deal fits.

Debt capacity is also where the existing notes get a hard look. An equipment loan at a high rate, a line of credit that never gets paid down, and a vehicle note might be better consolidated or paid off before adding a mortgage, both for the coverage ratio and for the monthly cash. That conversation is worth more than the building decision to some clients.

Depreciation, interest, and Section 179 on the fit-out

With the cash and the balance sheet done, the tax layer.

The building is nonresidential real property, depreciated over 39 years. Land isn't depreciated, so the purchase price gets allocated between land and building, and the allocation matters. A cost segregation study can move part of the building's cost into shorter-lived property that qualifies for bonus depreciation; whether the study pays for itself depends on the price and the property, and that's a conversation with the preparer.

Interest on the mortgage is deductible, subject to the business interest limitation that applies above the gross-receipts threshold, which most small businesses are under.

The fit-out is where the 2025 law matters most. Qualified improvement property (interior improvements to nonresidential buildings, with exclusions for enlargements, elevators, and structural framework) is eligible for 100 percent bonus depreciation now that it's restored for property acquired after January 19, 2025, and for Section 179 expensing up to the annual limit. A $150,000 build-out can be deducted in the year it's placed in service. That's a real tax saving in year one, and it's also cash that has to be spent in year one, which is why it appears in the 36-month forecast before it appears in the tax layer.

Who owns it is the structure question. Many owners hold the building in a separate LLC and lease it to the operating company, for liability separation and for a cleaner exit. That creates rent expense in the operating entity, rent income and depreciation in the property entity, and an intercompany relationship the books have to keep straight. It's a good structure when the books can handle it and a mess when they can't.

Concentration risk: when the building becomes the business

The last conversation is the one the owner didn't ask for. After the purchase, a large share of the owner's net worth is one building in one location, tied to one business. If the business shrinks, the building is harder to sell than a lease is to exit. If the neighborhood changes, the same. If the owner wants to sell the business in five years, the buyer may not want the building, and the owner becomes a landlord to a stranger.

None of that says don't buy. It says the decision includes a question about what the owner wants to own in ten years, and the firm is the only advisor in the room who has both the numbers and no commission on the answer. For firms building this kind of work into a tier, we wrote about the structure in reports that turn a firm into a CFO service.

Where the platform comes in

Woven is our product, and the four inputs above are things it keeps as a byproduct of the monthly close: the 13-week forecast that extends into a longer scenario view, a balance sheet built on statement-proven reconciliations, the loan sub-ledger with every existing note tied to the lender and the proposed mortgage modeled beside them, and separate entities for the property and the operating company with intercompany balances that tie on both sides and roll up to the owner. The firm's hour goes to the conversation about the roof and the ten-year plan rather than to assembling the numbers. To see the loan sub-ledger and the multi-entity roll-up on live books, book a demo.