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Strategies for Financing Corporate Real Estate: Owning vs. Leasing Considerations

In the corporate real estate landscape, firms own properties for various strategic reasons, including operational integration, diversification, and future expansion plans. Cash flow analysis plays a crucial role in determining the appropriateness of owning versus leasing. Key factors influencing this decision include space requirements, flexibility, risk management, tax implications, and access to capital. Understanding the intricacies of ownership, leasing decisions, and tools like sale-leaseback arrangements can help firms optimize their real estate investments and enhance financial performance.

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Strategies for Financing Corporate Real Estate: Owning vs. Leasing Considerations

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  1. CHAPTER FIFTEEN FINANCING CORPORATE REAL ESTATE

  2. Firms Own Real Estate for a Variety of Reasons • Owning is an integrated part of the firms operation • diversification from the core business • Retaining real estate from former business operations • Acquiring real estate for future expansion of relocation

  3. Cash Flow from Operations

  4. Cash Flow from Operations Continued

  5. Cash Flow from Sale

  6. Summary After-Tax Flows

  7. Owning vs. Leasing • If ATIRR of 13.79 is not sufficient to warrant the risk associated with owning, it should lease

  8. Other Factors Affecting Own vs. Leasing Decisions • Space requirements and need for flexibility • Length of time space needed • Ability to bear the residual risk associated with owning • Ability to manage the property

  9. Other Factors Affecting Own vs. Leasing Decisions Continued • Ability to lease special purpose buildings • Tax considerations • Access to capital to finance owning • Sometimes corporate debt is cheaper than mortgage debt

  10. Other Factors Affecting Own vs. Leasing Decisions Continued • Control over the property and location • Effect on financial statements • Operating vs. capital lease • Balance sheet vs. income statement • Desire for diversification

  11. Sale- Leaseback • Source of capital • E.P.S. • Most consider tax considerations • Mortgage may be at a favorable rate

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