Evaluating the Decision to Own Real Estate

From Peter Linneman and Frank Pfirsching:

One of the most important capital decisions made by corporations is whether they should own or lease their operating real estate (offices, industrial and warehouse facilities, and retail space). This decision is generally viewed by corporations as a trade-off between the present value of rental payments versus that of the operating costs of owning the real estate, net of expected capital appreciation and the depreciation tax benefits from ownership. The rule of thumb is that only if the present value of future rent is less than the present value of costs of self-ownership of the space (net of depreciation benefits, and expected property appreciation), should the firm lease rather than own. However, as this paper demonstrates, this analysis is fundamentally flawed, leading companies to own far more corporate real estate than is economically justified.

This is true in countries such as Germany, where corporate users own as much as 75 percent of their real estate, as well the United States, where roughly 40 percent is owned by corporate users.

Read the Wharton paper here.