Part 3: Should I Purchase or Lease Office Space?Oct 16, 2013
Making the Decision
In the first post of this series, we outlined key operational and non-financial factors that are driving the decision to own or lease real estate.
• Market/ Location
Next in part 2, we touched upon important financial considerations related to your occupancy cost decision.
• Required Capital Outlay
• Contractual Liability
• Balance Sheet Considerations
With your business/corporate strategy guiding the process, along with clear market insight and a firm financial perspective, you have the appropriate information needed build your discounted cash flow models and to perform a detailed comparative analysis for each option. After you have built your cash flow models, choose a comparison method to analyze the discounted cash flows to understand the best economic option.
Comparing Cash Flow
Here are two common methods and be sure to have your opportunity cost (i.e. return expectations) in mind as you begin your analysis. If you are a larger corporate user, use your company’s cost of capital as your discount rate for comparative purposes in each method rather than your occupancy cost.
Compare the net present value for each option at a discount rate using your company's cost of capital or the investment return you would expect if you were to invest outside your business, your opportunity cost. The option that has the greater value (lowest cost) is the best option economically.
This method identifies the yield or internal rate of return (IRR) by calculating the difference in cash flows from owning and leasing. You then compare the IRR to your opportunity cost and economically speaking, if the IRR is greater than your opportunity cost, purchasing is the better option. If the IRR is less than your opportunity cost, leasing is best economic option.
Decision Time: Ok, you've run the numbers and analyzed the operational and non-financial factors that are driving your business decision, what makes the most sense?
I help financial decision makers of mid-sized companies perfectly align their occupancy costs with their business needs, so that they increase profits and improve operational and financial performance."
If you need advice or assistance in making an informed decision, you can connect with me here, I’d be happy to help.