A Publication of WTVP

Deciding whether to purchase or lease a property can be a complex process. Apart from the financial analysis, the decision is influenced by one's internal operational objectives, estimates of a properties future sales price, and projected rental rates. In the long term, owning commercial real estate usually is more cost effective than leasing, assuming a modest amount of appreciation. However, no general answer applies to all cases. Each situation requires a financial analysis, including a thorough examination of the market to estimate future selling prices and lease rates.

A trained commercial real estate professional can create a lease-versus-own analysis that will take into consideration the after-tax effect of either option. Mathematically, it's a present-value problem; however, as most seasoned commercial real estate professionals know, assumptions such as operating space requirements, cost and availability of capital, future lease rates, and sale price projections can easily skew the analysis. For this reason, property market and capital market cycles should be included in the analysis.

Every property market goes through distinct periods of expansion, contraction, recession, and recovery. The process of estimating one's position relative to the market cycle can have a tremendous impact on the decision to lease versus own. The prudent analyst, developer, or consultant should diligently pursue an in-depth analysis of all relevant market factors before drawing any conclusions.

In a capital market cycle of very low interest rates, there's a strong case for the ownership of property versus leasing if the dollar analysis were the only factor considered. But the decision should never be portrayed as being that simple. Issues of company strategy, flexibility, and expansion should be an important part of any decision. IBI