Financial Management and Negotiation of Real Estate

Lease Analysis

  • Generally, the analysis of leases is fairly straightforward using a net present value analysis; this will compare several alternatives with different cash flows.
  • The highest and lowest price alternatives can be easily judged.

Sale vs. Lease Analysis

  • This analysis also uses net present value analysis to compare cash flows between buying and leasing.
    • Predicting the future value of the real estate asset is a wild card so it is best done under a best and worst case scenario.
  • Generally, if there is a high degree uncertainty in the business, leasing is preferred because this will reduce exposure to a real estate “bet.” Long term certainty in the business reduces the “bet” because of the buildings continual use and amortization.

Cost of Capital

  • The cost of capital is intrinsic to the Net Present Value Analysis. Companies will differ in their view of the cost of capital. Different scenarios tend to moderate the uncertainty. What is your cost of capital for real estate projects?
    • Corporate borrowing rate – 3.5%
    • Mortgage rate – 5.5%
    • Rate for new product investment – 20%
    • Blended rate?
  • One answer is to compare the cost of the real estate to other properties on the market.
    • Secondly, does the property provide more utility than others on the market do?

Asset Level Analysis: Basic Portfolio and New Property

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