what are some other costs and benefits of the lease versus buy option relative to real estate?
lthough the value of a business has little affect on the value of the real estate, owning real estate as a business asset offers some positive financial advantages. [ For instance, financing options are more numerous for real estate than for other capital assets. Because real estate is viewed as an investment with a virtually unlimited lifespan, it can be financed with equity, mortgage loans, or sale-leaseback financing. This last option-which is somewhat analogous to an interest-only loan with no requirement to ever repay the principal-is not available for equipment, which, in comparison,
has a brief lifespan and is more subject to functional obsolescence.
The best way to compare the value of owning commercial real estate to leasing it is to create a purchase versus lease model, similar to comparisons for other business investments. However, being able to either own or lease real estate makes analyzing financing alternatives more complex. With equipment, options are often limited to loans or capitalized leases, which are both debt equivalents. Therefore, comparisons are based on one factor: rate.
We can also make rate comparisons for real estate mortgages and operating leases. However, the analysis is complicated by the different tax ramifications and the need to factor in real estate appreciation and lease escalations.
In addition, real estate ownership carries a potential opportunity cost. Owning real estate through either equity or mortgage loan financing is likely to exclude further investment in the business, such as expansion or renovation. Further operations investment might produce greater returns than the real estate investment, thus creating an opportunity cost that accompanies real estate ownership. As a result, any comparisons made between owning and leasing should include an opportunity cost comparison as well as a rate comparison.Real estate ownership tends to absorb more cash flow than a lease since property loans generally require down payments and loan amortization. ]
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Asked 11/8/2011 5:27:41 PM
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