Own vs. Lease

Compares owning corporate real estate against leasing by treating ownership as an incremental investment, rent avoided plus the depreciation shield each year and after-tax sale proceeds at exit, solved to an IRR against the firm’s real estate hurdle. Inputs include annual rent, the tax rate, purchase cost, depreciable basis, recovery period, appreciation, hold period, and required return.

Interactive Tool

Own vs. Lease

Lease & tax

Annual rent (net lease)

Corporate tax rate

After-tax cost of debt

Own / develop

Purchase or development cost

Improvement (depreciable) basis

Recovery period

Appreciation / year

Hold period

Required real-estate return

Lease side

After-tax rent ($1,500,000 × 79%)

$1,185,000

PV of after-tax rent (10 yrs @ 4.74%)

$9,266,900

Own side, incremental investment

Annual depreciation shield

$129,231

Incremental CF / yr (rent avoided + shield)

$1,314,231

Year 10 sale (2.0%/yr)

$36,569,833

Gain tax (21% on $12,723,679)

$2,671,973

After-tax sale proceeds

$33,897,860

After-tax IRR of owning

5.39%

vs 8.00% hurdle

Verdict

LEASE

below the hurdle

Owning is a separate real estate investment. Here it earns below the hurdle, so the capital is better deployed in the core business, lease. Lower the cost (e.g., develop for less) and watch the IRR climb.

Learn the concept

This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.

Open Real Estate Finance

Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.