1. THE STRATEGIC REAL
ESTATE ADVANTAGE™
ANALYSIS OF BUY VS. LEASE

2. REAL ESTATE IS MORE
THAN A TRANSACTION
Commercial real estate can be complex and confusing
for even the savviest of business professionals.
Without the proper knowledge, systems and processes, it’s
easy to make decisions that cost you money and restrict
your ability to control the business, creating a negative
impact on the value of your enterprise, and impeding growth
opportunities and wealth creation.

3. THE STRATEGIC REAL ESTATE
MAPTM • Leverage Wealth Creation / Business Enterprise Value
• Business Advantage
Desired
Results
• The Right Place
• Economical
• Minimal Disruption/Maximum Ease
Barriers
Understanding The Real
Transaction Focus Direct vs. Total Costs
Estate Ecosystem
Actions
Outcomes
Expected

4. THE STRATEGIC REAL ESTATE
ADVANTAGE™

6. THE ADVANTAGE OF REAL
ESTATE

7. BUSINESS VALUATION
ADVANTAGE

8. THE THREE BARRIERS TO THE
ADVANTAGE

9. THE REAL ESTATE
ECOSYSTEM

10. DIRECT VS. TOTAL COSTS

11. THE STRATEGIC REAL ESTATE
ADVANTAGE™
Connecting
the
Dots

12. PURCHASE VS. LEASE
WHAT IS THE RIGHT STRATEGY?
May 9, 2012

13. THE TRANSACTION
TWO PRIMARY OPTIONS

14. PURCHASE VS. LEASE
THE ECOSYSTEM
1. Cash Outlay
2. Opportunity Cost
3. Direct vs. Total Costs
4. Growth Considerations
5. Property Management
6. Appreciation
7. Tax Factors
8. Cash Flow Analysis
a. Investment View
b. Occupancy View
9. Market
10. Other factors to Consider

15. THE ECOSYSTEM
CASH OUTLAY
• Purchase • Lease
– 10% to 20% of Project Cost – 1-2 Month’s Rent
– Improvements – Improvements
– Closing Costs – Security Deposit
Scenario Scenario
– 5,000 SF @ $340/PSF Project – 5,000 SF @ $30/PSF
Cost (incl. TI’s) – $50,000 in TI’s & Costs
– $25,000 transaction costs
$150,000 to $250,000 $45,000 to $75,000

16. THE ECOSYSTEM
OPPORTUNITY COSTS
• What Does Opportunity Cost Mean?
1. The cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by
taking an alternative action.
2. The difference in return between a chosen investment and one that is
necessarily passed up. Say you invest in a stock and it returns a paltry 2%
over the year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).
Source: Investopedia

17. THE ECOSYSTEM
DIRECT VS. TOTAL COSTS
• Purchase • Lease
– Payment – Rent
• Fixed for Term of Loan • Typically Escalates
• Financing Vehicle Driven • Market Driven
– Expenses – Expenses
• Actual Each Year • Increase Over BY
– Improvements – Improvements
– Transaction Costs – Transaction Costs

18. THE ECOSYSTEM
GROWTH CONSIDERATIONS
• Questions to Ask and Consider?
– How stable is your business?
• Is your business in growth mode or retraction?
• History
– What are your options and associated risks in different
company life cycles and each decision?

19. THE ECOSYSTEM
PROPERTY MANAGEMENT
Function Owner Landlord Tenant
Maintenance X X X
Asset Value X X
• Time is Money
– Employ or not to Employ
– Association’s

20. THE ECOSYSTEM
APPRECIATION

21. THE ECOSYSTEM
TAX FACTORS
• Purchase • Lease
– What Can Be Deductable?* – What Can Be Deductable?*
• Interest Payment’s • Lease Payments
• Depreciation of • Depreciation of
Improvements* Improvements?*
– 39 years (some less)
– Cost Recovery (25%)
– Capital Gains Treatment*
*Disclaimer- Consult your tax advisor for the impact of taxation

22. THE ECOSYSTEM
CASH FLOW ANALYSIS
• When Does it Make Sense?
– In order to understand the financial impact of purchasing and
the economic viability of the decision you must prepare a
detailed Net Present Value (NPV) cash flow projection.
– NPV compares the value of a dollar today to the value of that
same dollar in the future, taking inflation and returns into
account.

23. THE ECOSYSTEM
CASH FLOW ANALYSIS
• Inputs to Analyzing Cash Flows.
– Holding Period / Lease Term
– Discount Rate
– Anticipated Appreciation
– Loan Terms
– Rental Terms
– All Cash Outlays

24. THE ECOSYSTEM
CASH FLOW ANALYSIS
• Steps to Evaluating Cash Flows
1. Determine the After Tax Cash Flows
• Purchased Property
• Leased Property
2. Calculate the PV’s of Future Cash Flows
• Purchased Property
• Leased Property
3. Compare the PV of the Future Cash Flows
• Differential
4. Determine the IRR of the Differential of Cash Flows

25. THE ECOSYSTEM
CASH FLOW ANALYSIS
If Opportunity Cost is 12%, Does it Make Sense to Purchase?

26. THE ECOSYSTEM
COST OF OCCUPANCY
LEASE PURCHASE
• 5,000 SF • 5,000 SF
• $30.00 /PSF • $340/PSF
• 3% Rent Escalator • 90% LTV
• 2% Exp. Escalator • 4.5% Rate
• $10.00 opex • $10.00 opex
• 10 Year Term • 25 yr. Loan Term
• Starting Mo. Payment- $9,375 • Starting Mo. Payment- $12,670
• Ending Mo. Payment- $17,122 • Ending Mo. Payment- $13,484
10 YR. AVG. ANNUAL 10 YR. AVG. ANNUAL
PRE-TAX OCCUPANCY COST PRE-TAX OCCUPANCY COST*
$35.59/ PSF $31.36/ PSF

27. THE ECOSYSTEM
MARKET
200 Sales Volume (000,000) 250 # of Transactions
2007 200 2007
150
2008 150 2008
100 2009 2009
100 2010
2010
50 2011 50 2011
0 0

28. THE ECOSYSTEM
OTHER FACTORS
• Bank Incentives
• Historical Low Rates
• LTV’s
• Financing Options
• Regional & National Banks in Business
• Long Term Stability
• Peace of Mind
• Incentives
• Owners Giving More
• Low Values
• Comparative to Lease Rates
• Tax Reasons
• Depreciation Write-off’s ?
• Accelerated Appreciation?
• FASB Rules
• Tax Treatment of Leases

29. THE REAL ESTATE
ECOSYSTEM
EFFECT OF METRO
May 9, 2012

30. THE REAL ESTATE
ECOSYSTEM
PROPERTY VALUES