GENERAL FINANCIAL, MARKET AND BUSINESS CONSIDERATIONS
The foreign business owner’s most important task is to prepare a financial analysis that compares the respective net returns of owning versus leasing real property. On a very simplistic level, the main advantage of leasing is that the initial cash outlay to gain use and occupancy of real estate is generally much less than purchasing the real estate. Leasing also provides flexibility in the short term as one can simply move to a different facility at the end of the negotiated lease term. However, and as a corollary, the main advantage of purchasing real estate is that over the long term the cost of ownership is less than the cost of leasing, and the owner retains the value from appreciation of the asset over time. A full financial analysis of the benefits of leasing versus owning, however, is not quite as simple. The analysis will depend on the individual business owner’s intentions, short term and long term goals, and balance sheet capacity. For example, if the foreign business owner desires to purchase real property and construct a building, the financial analysis will include instantly recognizable costs such as equity contributions, financing fees, closing expenses and subsequent construction and maintenance costs, in addition to lesser known costs such as impact fees and permitting fees. In contrast, leasing property is generally a simpler analysis with fewer costs, such as base rent, operating expenses and maintenance costs.[1] Further complicating the process for the business owner is the necessity of applying appropriate federal and state tax laws for deductible expenses, recapture at time of sale, income and losses, and a present-value analysis of all future expenses and income. The “opportunity cost” of purchasing real property will also need to be considered, which because of its greater absorption of cash flow at the onset may prevent the business owner from pursuing other business opportunities in the future.
[1] The business owner should understand that the costs of development have not disappeared from the analysis when leasing property, but rather have been incorporated into the rental rates offered by the landlord.
[1] The business owner should understand that the costs of development have not disappeared from the analysis when leasing property, but rather have been incorporated into the rental rates offered by the landlord.