March 22, 2017

Your lease is about to expire. Your space needs or business have changed. You’re curious what other options are out there.

Corporate real estate directors are constantly challenged to balance the opportunities in a dynamic capital markets environment with the operational and financial goals of their companies.

Many companies follow a traditional course, and have ownership or leasing strategies driven by longstanding financial policies. Some have implemented proactive strategies for selected properties—such as sale-leasebacks of owned assets or acquisitions of short-term leased assets—to take advantage of the current capital markets environment.

Historically these decisions have been driven by chief financial officers and treasurers, but over the past five years we’ve seen corporate real estate directors take a more active role in surfacing these opportunities, evaluating the various economic, financial accounting and tax consequences, and making recommendations based on their companies’ operating and financial strategies.

Factors such as providing flexibility for a growing or contracting workforce should be considered for any real estate decision. Although a company policy may favor ownership, certain locations warrant consideration for leasing if the particular business unit has volatility in staffing or production, or if there are indications of declining real estate market conditions or potential obsolescence. Alternatively, locations requiring significant capital investment in equipment and infrastructure may favor ownership due to the relocation constraints created by such investment.

For any company, determining the appropriate cost of capital in preparing discounted cash flow/net present value comparisons for ownership versus leasing decisions is a critical variable. It is not uncommon to encounter situations in which finance executives differ in their perspective, such as a treasurer who advocates a cost of borrowing approach (prefers ownership), while a chief financial officer or chief operating officer believes the WACC is the appropriate metric. In these circumstances it is helpful to review a range of options, so the company can view the sensitivity to varying discount rates and make an informed decision.

JLL encourages corporate real estate directors to take an active role in collaborating with the senior finance and operation teams within their organization to develop a process for evaluating ownership versus leasing decisions, along with alternative structuring opportunities. A periodic review of the portfolio will facilitate keeping up with current trends in the real estate and capital markets, operating needs of the business units and the financial position of the company, and will result in optimal portfolio and individual property strategies.

JLL’s paper, “A tenant’s guide to evaluating ownership versus lease decisions,” will help you better understand decision-making criteria when it comes to buying or leasing for your entire portfolio, and individual property transactions.

Once you come to your decision, there are things to consider as markets fluctuate, employees multiply, new technologies emerge. One thing is certain: you need to make room for the future even if you can’t predict it.

Whether that means a moderate renovation or full-tilt relocation, this guide will help you start the discussion. So that if and when you decide to move (and even if you don’t), you’ll know exactly what to expect.


Brian Shanfeld

Managing Director, JLL Capital Markets

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