UGBA 180 Lecture Notes - Lecture 13: Apple Campus, Balloon Payment Mortgage, Customer Relationship Management
25 Jun 2018
School
Department
Course
Professor
Lecture 13
Financing Corporate Real Estate
Background
●Many firms buy and operate RE as part of business operations
●Corporate users control 75% of all commercial RE in the US
●About of the total assets of fortune 500 companies are tied up in RE⅓
Lease v Own Analysis
●Reasons to own
○Save on lease payments
○Receive tax benefits
○Option value of selling the property in the future
●Reasons to lease
○Opportunity cost of capital invested in RE
○Limited expertise in RE investment and operation
○Greater flexibility
●Example XYZ Co. opening office in new market
○Numbers
■Annual sales increase by 1.5M
■Cost of goods = 50% of sales
■Corporate overhead increases by 200k (doesn’t include RE costs)
■Will have to invest 1.3M in office set-up (regardless of lease v own)
■Question: lease or buy new office space?
○Comparison of cash flows
■Lease
●180k/yr, 15 year term, XYZ pays all operating expenses (~50% of
lease payments)
find more resources at oneclass.com
find more resources at oneclass.com
●
■Buy
●Purchase 1.8M (225k land, 1.575M building)
●Depreciates over 31.5 yrs
●30% tax bracket
●Can be sold for 3M in 15 years
●Interest only mortgage for 1.369M (10% interest, balloon payment
after 15 yrs)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Many firms buy and operate re as part of business operations. Corporate users control 75% of all commercial re in the us. About of the total assets of fortune 500 companies are tied up in re. Option value of selling the property in the future. Opportunity cost of capital invested in re. Limited expertise in re investment and operation. Example xyz co. opening office in new market. Cost of goods = 50% of sales. Corporate overhead increases by 200k (doesn"t include re costs) Will have to invest 1. 3m in office set-up (regardless of lease v own) 180k/yr, 15 year term, xyz pays all operating expenses (~50% of lease payments) Can be sold for 3m in 15 years. Interest only mortgage for 1. 369m (10% interest, balloon payment after 15 yrs) Leasing or buying the new office building. Informative for choosing between expansion and alternative investment opportunity. Use incremental irr to more directly compare lease v own.
