By: Rob Roe, Managing Director, JLL
There is no blanket response to the question, “Which is better for business, owning or leasing property?” Every business’ unique structure and qualities must be assessed to determine the right path.
What’s more, the decision has potential to have a disastrous (or extraordinary) effect on bottom-line business success.
Traditionally, business executives, like CEOs, CFOs or treasurers, made the own/lease decision. In recent years, however, corporate real estate directors have played a larger role in the process. Regardless of point person, expert insight is a must when it comes to one of the largest expenses within your budget.
Are you at the crossroads of purchase or lease? Read on for more insight on smart decision-making.
Starting Point: 3 Business Benchmarks
As you begin the process, there are three key benchmarks to consider. Ignore your initial preference, and keep an open mind. The following factors may sway your line of thinking and lead to a smarter decision-making in the long run.
- Operational elasticity. Is your workforce growing or downsizing? Even though your company may favor ownership, leasing may be a better option if your business could fluctuate in staffing or production. On the flip side, prime models for ownership include locations that require specific equipment or significant investments. If relocation would result in business loss, consider ownership.
- Cost of capital. Determining cash flow versus cost of capital for ownership and leasing decisions is critical. Companies with significant reserves of cash-savings and short- term investments, as well as a high investment grade debt rating may prefer to own. A differing point of view: companies that apply the weighted average cost of capital (WACC), may favor leasing opportunities. According to JLL’s white paper, “The theory is that such decisions are longer term in nature and reflect investment decisions as opposed to financing decisions.”
- Accounting and income tax. Debt is another big consideration. Some businesses steer clear of ownership to avoid debt. Others simply want to maintain positive credit and borrow money for other amenities and uses. In this case, prospective property owners should weigh devaluation and interest expenses, as well as the cost of income tax in comparison to cash flow.
Next Step: Evaluate Your Portfolio
Whether you’re a Fortune 500 company or medium-sized enterprise, it’s smart to pause and reflect on the status of your current portfolio. The three major factors to consider in terms of your portfolio include:
- Flexibility. Ensure that at any point in your business’ real estate cycle your business has options. This can be achieved through featuring a combination of owned and leased properties in your portfolio.
- Capital allocation. Oftentimes, businesses are biased toward ownership. But, see to it that senior management analyzes all bottom-line monetary factors before jumping to conclusions.
- Match funding. In the words of JLL’s white paper, “Match funding involves accessing financing with a similar weighted average life to the assets being financed.” This practice allows for more accurate forecasting for all financial obligations—taking liabilities and refinancing risk into account.
Breaking It Down: Own vs. Lease
Commercial real estate is one of the biggest financial decisions a company will ever make. The decision to own or lease can have long-term implications—both good and bad. Take your time while making the decision, and if needed, ask for help.
“The complexity of the current business landscape, combined with ever increasing expectations of performance, and the speed at which decisions must be made, are a potential recipe for disaster for today’s executive unless a defined methodology for decisioning is put into place.” — Forbes
When it comes to buying or leasing, ensure you’ve examined all critical business and portfolio factors. Document the process too, to ensure buy-in from your team. Check out our guide, “Ownership vs. Leasing Decision Criteria,” for a quick list of variables (above).
For more details and information about choosing the best leasing decision, download “Perspectives on leasing: A tenant’s guide for evaluating ownership versus lease decisions.”
About the Author
Rob Roe is Managing Director of Jones Lang LaSalle, Great Lakes Region and manages the Regional Brokerage Operation. Mr. Roe is responsible for providing real estate transaction representation and consulting services for Jones Lang LaSalle clients around the world. View Rob’s full bio to read up on his experience, or connect with him on LinkedIn.
Image credit: Chris Potter, Flickr Creative Commons