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Corporate Real Estate Decisions: Lease vs. Own Analysis and Sale-Leasebacks, Exercises of Real Estate Management

An in-depth analysis of corporate real estate decisions, focusing on the lease vs. Own analysis and sale-leasebacks. Businesses must make real estate decisions, and the method for making these decisions is the same regardless of ownership structure. The costs and benefits of owning versus leasing, including up-front costs, operating costs, taxes, and cash flows from sale. It also discusses sale-leasebacks as a financing alternative and the key differences in analysis. Examples and calculations to illustrate the concepts.

Typology: Exercises

2012/2013

Uploaded on 10/01/2013

dinesh
dinesh 🇮🇳

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Corporate Real Estate Decisions
1) What is Corporate Real Estate Analysis?
a) Every business must make real estate decisions during the ordinary course of
its business operations:
b) Corporate real estate analysis refers to all of these real estate decisions.
The word “corporate” simply reflects the fact that so many businesses
have a corporate organizational structure. The decisions, however, must
be made by all businesses, and the method for making these decisions is
the same regardless of ownership structure.
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Corporate Real Estate Decisions

  1. What is Corporate Real Estate Analysis?

a) Every business must make real estate decisions during the ordinary course of its business operations:

b) Corporate real estate analysis refers to all of these real estate decisions.  The word “corporate” simply reflects the fact that so many businesses have a corporate organizational structure. The decisions, however, must be made by all businesses, and the method for making these decisions is the same regardless of ownership structure.

  1. Lease vs. Own Analysis

a) The decision whether to lease or own space is one of the most basic and common real estate decisions that most businesses must make.  Basic goal: Determine the total cost of using the space under each alternative.

 Owning real estate puts the firm in the __________ business, whether it intends to be or not. The consequences of this include:

b) Consider the Marcus Products, Inc. example from the Lease vs. Own handout:

Up-front costs:

Own Lease Difference

Purchase price

Mortgage

Cash down payment

Acquisition costs

Total investment

Own Lease Difference

Total RE expenses

Annual debt service

Taxes

After-tax cost

NOTE: You will do this for each year of the holding period

Cash flows from sale:

Own Lease Difference

Sale price

Selling costs

Net sale price

Adjusted basis

Total Gain

Tax @ 35%

Own Lease Difference

Net sale price

Mortgage

Tax

After-tax cash flow

 If we calculate the cash flows for each year, we get the following:

Own Lease Difference Year 0 (3,600,000) - 0 - (3,600,000) Year 1 (455,086) (526,500) 71, Year 2 (461,258) (526,500) 65, Year 3 (470,276) (526,500) 56, Year 4 (479,644) (526,500) 46, Year 5 (489,378) (526,500) 37, Year 6 (499,493) (585,000) 85, Year 7 (510,008) (585,000) 74, Year 8 (520,942) (585,000) 64, Year 9 (532,315) (585,000) 52, Year 10 4,840,090 (585,000) 5,425,

NOTE: Year 10 cash flow from owning is the $5,386,749 after-tax cash flow from the sale minus the after-tax expenses of $546,659.

 NPV of after-tax cash flows from owning:

 So what is different if MPI leases the space rather than purchasing it?

c) Leasing as a financing alternative

d) Non-financial factors affecting the lease vs. own decision

  1. Sale-Leasebacks

a) What is a sale-leaseback?

 Sale-leasebacks are essentially a _______________ decision.

b) Analysis of a sale-leaseback is much the same as analysis of the lease-vs.- own decision. Key differences include: