Properties Magazine November 2012 : Page 40

FINANCIAL STRATEGIES Smart use of fiscal planning & action Rent to Own Part II L ast month, we started a discussion on the topic of leasing versus owning real estate. If you missed that article (and shame on you if you did), we listed a variety of positive and negative factors that help influence this decision. Nearly all of these factors have at least some degree of subjectivity and all will vary in importance to specific companies. This month, we are going to introduce a much more objective factor, one that illustrates the difference in a manner that all companies understand: dollars and cents. 3. All consider cash flow after taxes, recognizing the impact of operat-ing expenses, property tax, financing costs and income tax obligations. ALEC J. PACELLA There are many different models floating around that perform an apples-to-apples comparison of the cost to rent and the cost to own. Despite the fact that all of these super-duper programs look dif-ferent, they have three common elements: I will use an example to illustrate how these models work. Suppose that a company is con-1. All utilize the time MOVING ON UP The list of potential sidering a new location value of money com-downtown residential projects con-and has explored both tinues to grow and now totals over ponent known as 1,100 to-be-developed units. If all a lease and a purchase. Present Value (PV). come to fruition, the number of units The lease is a 10-year The timing of the downtown would top 5,000. –AP term with the net rent of cash outflows will be $1,000,000 for the first much different for five years and $1,100,000 for the second the lease scenario as compared to five years. The purchase has a price the owned scenario and using a PV of $11,400,000, of which $9,000,000 calculation on each will result in a is the value of the improvements and more meaningful comparison. $2,400,000 is the value of the land. The 2. All utilize a discount rate that is company can obtain a $9,120,000 loan, reflective of the company’s opportu-20-year amortization and 10% interest nity cost – i.e., the return they would with annual payments. The company ordinarily anticipate associated with estimates the building will be worth $20,000,000 at the end of 10 years and it their underlying business. Daus, You Know? 40 3URSHUWLHV | November 2012

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