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Working Papers

Corporate Real Estate Strategies

Working paper #312
Peter Linneman

• For firms in rapidly changing industries, long-term leases are excessively long-lived capital commitments that create a potentially serious duration mismatch between the life cycles of the companies’ operations and its capital needs. For most firms, 3-7 year leases offer the best match to their changing needs.
• Corporate real estate managers’ attempts to reduce the impact of rising rents by buying or long-term leasing space are the equivalent of “chasing rainbows”. On average, present day real estate prices capitalize expected future rents, so that buying property merely locks in higher expected future rents, a fact often obscured by the “magic” of straight-line depreciation.
• When determining the length of leases, corporate users should err on the side of too short, rather than too long. The cost of leasing too short is relatively calculable and manageable—a few dollars per foot more if they had signed a longer lease. The cost of leasing too long is more difficult to determine precisely and to manage. It includes the foregone return from deploying capital in a more attractive business opportunity as well as the loss in flexibility associated with illiquid and immobile assets.
• Most corporate users should liquefy their current ownership positions. Options available include obtaining matching non-recourse debt, which reduces the amount of capital tied up in corporate real estate. Alternative strategies include selling properties one-off or as a portfolio, swapping properties for shares of public companies, or a tax free spin-off to share holders.

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