In today’s low interest rate environment, many occupants of office, retail and industrial space are asking themselves, “Would it be better to own the build we occupy or continue to lease?”
The answer is a complicated one, and usually includes both qualitative and quantitative variables. While there are a multitude of qualitative questions which need to be considered, one of – if not the most – important question any business owner needs to answer is, “Can I make more money reinvesting in our core business, or are there financial advantages to ownership?”
Luckily, this answer is something which is measurable. LeaseMatrix’s Lease vs Buy Analysis Template allows users to analyze and compare owning or leasing the same building, or even two different buildings.
Our Lease vs Buy Analysis Template (download it here) projects up to 15 years of before and after tax cash flows, then calculates the Net Present Value (NPV) and Internal Rate of Return (IRR) of the cash flow differential of the two. In doing so, users are able to quantify whether owning or leasing would be a better financial decision under the assumptions provided.
One unique feature of the template is that it include 3 charts which provide specific recommendations to the users. These charts are 1) The NPV of the Cash Flow Differential by Year 2) The NPV of the Own and Lease option 3) the IRR of the Cash Flow Differential by Year.
These charts graphically depict these industry standard metrics allowing users to provide specific recommendations which all stakeholders can easily understand.
In the example above, the charts show that it is beneficial to OWN so long the user’s time horizon is 5 years or greater. But by looking at the IRR of the Cash Flow Differential (the 3rd chart) it shows that the IRR is just above the NPV discount rate of 8.0%. In other words, while ownership is projected to be profitable over a 5 year or greater hold period, the return is not a “home run”, but rather the same rate of return which they could realize by reinvesting cash into the core business (8.0% in this instance), rather than owning real estate.
In addition to these recommendation charts, this model outlines the before and after tax cash flows of each alternative, side by side, as well as the underlying assumptions used to generate the analysis.
To view more screenshots of our Lease vs Own Analysis Template checkout this page.