How to weigh the decision of buy versus lease

Joseph V. Barna, SIOR, principal, CRESCO Real Estate

Joseph V. Barna, SIOR, principal, CRESCO Real Estate

Whether to buy or lease is a question real estate professionals hear from business owners all the time. It’s a difficult decision that’s based on several factors.

You should evaluate your needs, as well as your personal and business goals, with a qualified real estate consultant, says Joseph V. Barna, SIOR, principal at CRESCO Real Estate. Also, understand your motivation drivers — are you interested in the bottom-line cost of occupancy, long-term ownership, image or flexibility?

“You need to step back and look at where you’re at, where you want to go, and how important your personal goals on the ownership side are in order to understand the best manner in which to invest your money,” he says.

Smart Business spoke with Barna about what propels owners to buy or lease.

What drives owners to buy?

One example would be if you are in a specialized industry and you’re going to make a significant investment in the space’s infrastructure. You don’t want to be unable to come to terms on a down-the-road lease renewal or expansion and have to reinvest in another building.

Another scenario is that you don’t anticipate long-term future growth and the facility you identify is in a desirable location that meets your projected needs.
Many times, the deciding factor is whether you can buy a building, ‘right.’ If a building can be acquired in the lower range or below market value and/or combined with market-driven incentives, the opportunity is worth serious consideration.

Sometimes it comes back to pride of ownership. In Northeast Ohio, we are fortunate to have a wealth of successful entrepreneurs who want to own their real estate simply for pride or a desired image, even if they have to pay a premium for it.

Why do business owners decide to lease?

One reason would be that your space requirements could fluctuate, so you don’t want to be locked into a building. Often this can be market driven; your business grows when the market’s healthy and contracts when it’s not. Also, many large national or global companies lease space because they don’t want to be in the real estate business and worry about selling a property when they decide to relocate.

You also should look at the return on investment. In real estate, a typical return for a market transaction would be 8 to 13 percent on the property’s value. However, if you have a dynamic business that’s getting a 25 to 30 percent margin on your products, it may be better to put your cash into increasing manufacturing and market share for the higher ROI. In addition, our financial markets have changed over the past five years. In most cases, traditional real estate financing has higher equity requirements, such as 25 to 35 percent down, which could also be a deal killer.

How can a lease-purchase analysis help?

To determine the actual cost of occupancy, bring in a qualified broker or consultant to run a lease versus purchase analysis. On the lease side, you look at your base lease rate, utilities, pass throughs and any other additional costs. On the sale side, you’re weighing your equity requirement, mortgage payment, property upkeep, maintenance, insurance and taxes. The analysis gives you a clear-cut idea of whether you’re better off leasing or buying.

The final decision will not always be the lowest cost alternative, but this analysis will at least let you know where you stand based on the cost of occupancy. Then you can consider other factors, like proximity to your customer base as well as employees, flexibility and personal objectives.

How far out should you start considering whether to lease or buy?

The perfect situation is at least one-and-a-half to two years ahead of when you need to make a decision. You need to understand the current market trends, all of the logical lease and sale alternates and the price of new construction, while projecting where your business will be in five or 10 years combined with personal objectives. You can go into the market and identify the perfect alternative, but it could take a year to consummate a transaction — and even more time if you’re building new, retrofitting or applying for government incentives. If you let that fuse get too short, it limits your alternatives.

Joseph V. Barna, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1464 or [email protected]

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Best Buy founder offers to buy shares for $24-$26 each

RICHFIELD, Minn., Mon Aug 6, 2012 – Best Buy Co. Inc. founder and former Chairman Richard Schulze on Monday offered to buy the shares he does not already own in the electronics retailer for $24 to $26 each.

Schulze, who owns 20.1 percent in Best Buy and is its largest shareholder, said he has held talks with top private equity firms. His offer would value the firm at between $8.16 billion and $8.84 billion.

The offer would represent a premium of between 36 percent and 47 percent over Best Buy shares’ closing price on Friday of $17.64.

Dell to buy Quest Software for $2.4 billion

ROUND ROCK, Texas, Mon Jul 2, 2012 – Dell Inc. will buy enterprise management software maker Quest Software Inc for $2.4 billion in cash.

Dell’s $28-per-share offer for Quest trumps private investment firm Insight Venture Partners’ latest offer of $25.75 per share.

Quest shares closed at $27.81 on Friday on the Nasdaq.

Goldman Sachs adds JPMorgan Chase & Co. to conviction buy list

NEW YORK, Tue Jun 26, 2012 – Goldman Sachs added JPMorgan Chase & Co. to its America’s conviction buy list, saying the U.S. bank’s capital position and earnings power can offset its recent hedging loss of at least $2 billion.

Goldman downgraded Morgan Stanley to “neutral” from “buy,” and removed the stock from its conviction buy list, saying earnings could be hurt by muted capital markets activity.

While Goldman sees value in Morgan Stanley’s shares at current depressed levels, it expects better returns at JPMorgan.

The 15 percent decline in JPMorgan share price since the largest U.S. lender by assets announced trading losses at its chief investment office has been “drastic,” given the unit’s 5 percent average earnings per share contribution, Goldman said.

JPMorgan, which has temporarily halted its $15 billion share repurchase program, may also resume buybacks this year, lending further support to the stock, Goldman analysts said.

Goldman, however, cut its second-quarter earnings estimates for JPMorgan to 60 cents from 75 cents to reflect a quicker recognition of its trading losses.

The brokerage cut its price target on Morgan Stanley to $16 from $20.

In the long-term, Goldman said JP Morgan and Morgan Stanley offer meaningful return on equity.

Shares of JPMorgan closed at $35.32, while Morgan Stanley closed at $13.48 Monday on the New York Stock Exchange.

Starbucks launching new chain, buys juice company Evolution Fresh

SEATTLE ― Starbucks Corp. said it plans to open a health and wellness-focused chain next year after its acquisition of Evolution Fresh, a California-based premium juice maker, for $30 million.

Both moves were announced on Thursday.

The announcements come as the world’s biggest coffee chain seeks to increase sales by expanding into the $50 billion U.S. health and wellness category that is driving robust growth for retailers including Whole Foods Market Inc.

The Seattle-based company has been expanding the number of products it sells through grocery stores and other retail outlets and recently removed the word “coffee” from its logo to signal its move into broader categories.

“Bringing Evolution Fresh into the Starbucks family marks an important step forward in this pursuit,” Starbucks Chief Executive Howard Schultz said in a statement.

The company’s new retail concept, planned to launch in early-to-mid-2012, will be separate from Starbucks cafes and does not yet have a name.

The new chain will “redefine the super-premium juice category and experience” and offer a “wholesome portfolio” of food and beverages, Starbucks said.

Evolution Fresh was started by Jimmy Rosenberg, the founder of Naked Juice. The company uses a heat-free, high-pressure pasteurization process that it says retains more of the nutrients in its products compared with using conventional heat pasteurization.

Evolution Fresh’s products are currently sold in Whole Foods and PCC Natural Markets stores on the U.S. West Coast. Starbucks plans to expand distribution into additional retail channels and sell the products in its own retail stores.

Over time, Starbucks said it plans to invest in Evolution Fresh facility upgrades as well as its distribution business.

Starbucks expects Evolution Fresh to operate at a modest loss in fiscal 2012 before breaking even in fiscal 2013.

The company, which returned to profit growth in 2010 after a painful two-year restructuring, said its forecasts for fiscal 2012 are unchanged as a result of the acquisition.

Shares of Starbucks, which are up about 40 percent over the last 12 months, were up 1.2 percent at $43.48 on Thursday afternoon on the Nasdaq.

Shares of potential rival juice chain Jamba Inc. were up 3 percent at $1.71 after the announcement.

General Dynamics to buy Force Protection for $360 million

FALLS CHURCH, Va. ― Defense contractor General Dynamics said it would buy smaller rival Force Protection Inc for $360 million to expand its armored vehicle business.

Shares of Force Protection, which also swung to a quarterly profit, rose to $5.60 in pre-market trading, surpassing the offer price of $5.52 a share. General Dynamics’ offer is 31 percent more than Force Protection shares’ Friday closing price.

The deal for Force Protection comes as concerns linger over massive defense budget cuts and an expected withdrawal of U.S. forces from Afghanistan and Iraq.

Force Protection, known for its Buffalo, Cougar and Ocelot brands of armored vehicles, on Monday posted a quarterly profit above analysts’ expectations.

The company ended the quarter with a funded backlog of $652 million and said it has “full visibility” for the delivery of about 100 Buffalos per year for both 2012 and 2013, with more shipments expected through April 2014.

General Dynamics, which makes armored vehicles, ships and business jets, expects the deal to add to earnings in 2012.

Force Protection, which has delivered more than 3,000 vehicles under the U.S. military’s Mine Resistant Ambush Protected vehicle program, will become a part of General Dynamics Land Systems, which makes Abrams main battle tanks and Stryker infantry combat vehicles.