The Real Real Estate Question: What Money Costs

The benefits of ownership are fairly obvious when looking at ownership and leasing options. Ownership gives a company: 1. complete freedom to operate the building as it wishes, within the limits of the law, 2. tax savings from depreciation, and 3. all appreciation in the building's value. If a...

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Bibliographic Details
Published in:Harvard business review 1987-05, Vol.65 (3), p.92
Main Author: Nessen, Robert L
Format: Magazinearticle
Language:English
Subjects:
Buy or lease decisions
Capital costs
Capital expenditures
Financial analysis
Leasing
Purchase options
Real estate
Renting & leasing
Tax reform
Tax Reform Act 1986-US
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Summary:The benefits of ownership are fairly obvious when looking at ownership and leasing options. Ownership gives a company: 1. complete freedom to operate the building as it wishes, within the limits of the law, 2. tax savings from depreciation, and 3. all appreciation in the building's value. If a company wants to select the leasing option, the benefits of leasing must compensate for the loss of ownership. The compensation will be found mainly in savings in the cost of capital. The choice between leasing or owning should be treated as a financial, not a real estate issue. The biggest drawback to leasing is the abrupt change in the company's rights over the use of the property at the expiration of the lease. The Tax Reform Act of 1986 limits tax benefits to investors, and they can no longer depend only on these benefits for their return. Since the reform, companies leasing property have to pay rents that cover the mortgage payments plus give the investor a satisfactory current cash return.
ISSN:0017-8012