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Corporate Real Estate Decisions
- 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.
- 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
- 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:
