Lease vs. Purchase Analysis

Should I lease or purchase? This is an important decision that can be very impactful. The lease versus buy decision starts with a comparison between the net present value of the cash flows associated with leasing and purchasing.

The outcome of a lease-versus-purchase analysis is affected by a number of variables, including the following: acquisition price and cost; percentage of the acquisition price to be allocated to depreciable improvements; rental rates and any escalations; pass-through expenses; the term of the lease or anticipated holding period; the user’s cost of funds; the user’s marginal tax rate and capital gains tax rate; and often the most subjective variable is the disposition price projected at the end of the holding period along with any cost of sale.

Every lease-versus-purchase analysis requires a thorough comparison of after-tax cash flows as viewed from the user’s perspective. But our advisers go a step further to compare the internal rate of return (IRR) on the cash flow differential so that users can compare that IRR with available rates of return from other investments to determine which is the best alternative. If that’s not enough, we go one step further to determine what the annual growth rate of the property would have to be over the holding period to cause the sale price to equalize the net present values of the lease and purchase.

In addition to quantifiable variables considered for both alternatives, our advisers will help evaluate other related issues and concerns such as the ability to expand and contract business operations or to relocate in the near future to more fully serve a given market.

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