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Real Estate and Capital Structure Decisions -Lease-Versus-Buy Analysis                                                                                                                                                                                                                
Product Ref: 03/158C Company: N/A

Product Type: Case Industry: Real Estate

Related Product(s): Teaching Note
This case provides market data to support analysis of a lease or buy decision. The case demonstrates what is known as the "leasing puzzle" - the two forms of financing (lease or buy) are not cost equivalent in the presence of capital market imperfections despite both being credit forms. It explores asset-specificity arguments to support the view that generally, firms should not own their own office space unless their core business dictates it. This case presents two opposing anecdotes: one involves a trading company that bought its office space and profited hugely from this decision as the market and capital values moved upwards, but then faced huge losses as the market declined; the second, involves a comparable trading company that leased its office space, and applied its capital to grow the trading business without diversion. The example illustrates why trading companies should not take the opportunity to capitalise on a buoyant real estate market. The argument is that shareholders do not need trading companies to invest in properties for them, since they can do this through their own investment portfolio activities. The case also explores issues such as shareholdersˇ¦ rights, and accounting and tax implications.
Functional Area : Finance & Investments
Strategy & General Management

Issues: office lease or buy decision, rental market dynamics
Length: 12 pages Country: Hong Kong SAR

Pub. Year: 2003 Level of Difficulty: 1
This product type is available in the following language(s):      English   Simplified Chinese
Related Information: N/A
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