Table of Contents
I. Introduction 3
Overview 3
The Company 3
Situational Analysis 3
II. Case Analysis 3
Considerations 3
Purchasing 4
Recommendation 5
III. Summary & Conclusions 5
IV. References 5
V. Appendix 6
I. Introduction
Overview
This case provides real estate market data for the analysis of an office lease-or-buy decision. The case demonstrates what is known as the “leasing puzzle” – the answer simply being that the two forms of financing are not cost equivalent in the presence of capital market imperfections, despite both being credit forms. The case presents two opposing anecdotes: one about a trading company that bought its office and profited hugely from this decision as the market and capital values move
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Nevertheless, we will determine the answer entirely by assumptions about interest rates and rental market dynamics.
II. Case Analysis
Please answer all the case questions in the case (if any) and the following aspects.
Considerations
1. What factors should Jonathan consider when making a buy or lease decision?
There are benefits and risks involved in both buying and leasing. The decision would have different effects on the company. However, we will decide based on a comparison between the net present value of both borrowing-to-buy alternative and the cash flows associated with the leasing alternative. Factors that Mr. Young needs to consider in the lease-versus-buy decision are the effects on the company’s growth opportunities in addition to the cost and the risks involved in each alternative.
Buy Decision
The risks in buying include the fluctuation of the value of the property depending on the economic situation. In a financial crisis, currency value could depreciate, making investors pull out of property investment, thus, decreasing property prices. The benefits of owning include the potential for price appreciation, the ability to stay in the same location and conduct business over the long run, and the tax benefits of buying.
Buying office space would have to be financed either by debt or by equity. Financing the purchase through debt would increase the company’s debt ratio and may decrease the company’s ability to obtain more credit for
Think cautiously when getting involved in real estate investment. Don't look at a property for how much money it can make you. Instead look at it at how much of your money it will let you keep. You want the property value and rental income to maintain the overall investment of your portfolio that you put into
d. Is it more beneficial to continue leasing the business space or to buy the building?
Can we prevent any or all of these factors from having an impact on the property market?
3. Briefly state the facts of this case, using the information found in the case in
Nowadays, investing in real estate is one of the lucrative commercial sectors that will provide large chances for an investor to generate cash with no trouble. Real estate is a commercial industry that, over time, has dealt with very small threats or failures. This is measured in such a way that investing in real estate is very much gainful and favorable when assessed to divide selling and buying cash or perhaps trading gold, silver, or even platinum.
The investing activities showed a reduction in the cost of acquisition of equipment and favorable lease rights, but an increase in short-term investments. This reduction is the result of the leases providing a minimum annual rent that adjusts to set levels during the lease term. Approximately 52% of the leases provide additional rent based on percentage of sales to be paid when designated levels are achieved. The increase in short-term investments center around expansion and remodeling costs.
There are several reasons for me choosing this particular area to research, the first is a strong interest in finance and my desire to work in this sector after graduation. Secondly, the potential volatility and substantive gains and losses associated with the property market, make for an interesting study area. Looking at the foreign investment dimension culminates both of the aforementioned contemporary aspects, with my aim to add knowledge and understanding to the world.
Having read the above case synopsis, list other additional factors that could have further complicated this case.
Upon agreement for this “rent-to-own” payment process, a potential buyer must meet monetary checkpoints that lead to further saving and increase of investment. Two key factors come into play through this payment method, option consideration and rent credit. Option consideration is a 2.5% to 7% of the total lease purchase price that is paid up front to the seller as an incentive to agree to the “rent-to-own” process (Tuman). Although it is more expensive up front for the buyer, this option consideration is more beneficial than it first appears. Upon the payment of the option consideration the negotiated price of the home is set, the right to buy the house is securedand rent credit becomes available. Rent credit is another aspect of this payment that is more expensive butis more beneficial than it first appears. Rent concept is the idea that is a buyer pays a higher monthly rent that incorporates a percent that acts as additionally credit, this additional money per month goes to the final payment of the house. This concept has the ability to lower the lease purchase price down several thousand dollars
Which costs would you take into account in making your decision, fixed costs, variable costs or both? Make sure to explain your analysis in the decision that you have to make.
This case involves an investigation of the factors that affect the sale price of Oceanside condominium units. It represents an extension of an analysis of the same data by Herman Kelting (1979). Although condo sale prices have increased dramatically over the past 20 years, the relationship between these factors and sale price remain about the same. Consequently, the data provide valuable insight into today’s condominium sales market.
Please prepare an analysis of this case. Your write-up should be 4 to 7 pages. Each of the following questions should be addressed individually:
That given that we have a favourable lease decision, we are better off on average developing the resort, but in the absence of a certainty on lease decision, its unclear whether we should exercise out option or not in the first place.
Read Case 1.9, "ZZZZ Best Company, Inc." in your text. Answer questions #1, 2, and 4 found at the end of the case.
A difficult characteristic to understand about the housing market is how a price is given for a particular house. That price will be designated to that particular house alone. All houses have various pricing, so I can’t always assume that one will cost more or less than any other. The pricing for houses vary based on their characteristics. Each characteristic must be analyzed to determine its contribution or detraction toward the price. I have taken some of these characteristics and modeled the relationship between them and the price of real estate for a specific area.