To Buy or to Lease
David G. Hunt provides some factors for firms to consider in deciding between purchasing and leasing commercial property:
1. The availability of capital: Firms should evaluate their capital requirements now and in the near future. Real estate should not take a disproportionate portion of their cash reserves.
2. Opportunity cost: Firms should compare the returns derived from placing capital into real estate versus investing it in other areas of the business.
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3. Anticipated growth: A purchase may not make sense if the company plans to sell and relocated within a short time (e.g. less than five years). The upfront expenses of a purchase would remain unamortized and may make the purchase unprofitable.
4. Cash flow analysis: A firm should calculate inflows and outflows during the desired holding period, discounting all funds to its present value and considering market appreciation. The resulting scenarios may assist in deciding between a purchase and a lease.
Last Updated on March 27, 2012 by Ramin Seddiq