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Naive question, but why would large companies favor leasing instead of just outright purchasing the property? It seems that when the terms of the lease are up,

Naive question, but why would large companies favor leasing instead of just outright purchasing the property? It seems that when the terms of the lease are up, the leasing company has almost unlimited leverage in the next negotiation (unless the tenant company doesn't mind relocating all of its employees).

imgabe 9y ago
The leasing company might not have as much leverage as you think. Finding another reliable tenant to take over that much space at once would not be easy. Most likely it would need to be split up into multiple tenants, which means they would need to pay for a certain amount of renovation. It would be much easier and cheaper to have the current tenant stay. Some companies own their own real estate, but that involves hiring a number of people dedicated to managing it. It might be more efficient to outsource that to a landlord. There are probably also tax implications to one or the other depending on the company's situation.
calvinbhai 9y ago
My guess: If they grow to be big enough, then they can move out at build their own campus. Equalises the leverage at that point. Also, the lease term will be for more than a few years (IMO 5-10) and that’s good enough time to figure out growing plans.
bkjelden 9y ago
There can be tax advantages to having your office space show up as an operating expense rather than a capital expenditure.
pfranz 9y ago
I worked at a larger company and I heard they sold their property and leased it back from them. I was told it was a liquidity thing. I imagine it lets you focus on your company and lets you be more flexible if you do need to upgrade or downgrade. When they lease a space, it's a contract, so they could put in favorable language for renewing the lease. Guinness brewery famously has a 9,000 year lease paying only £45 annually.
alexasmyths 9y ago
Buying a chunk of property is very cash expensive for a growth company. If you think about it - do you want to invest in 'real estate' or your 'high growth business'. And buildings are very expensive so it would be a huge amount of cash. And cash-flow is always an issue in a growth company. Of course, it would mostly be financed with a mortgage, but then you get into a weird balance sheet situation - massive asset, and if the company folds, or wants to move, what do you do with it? It's hard to just 'flip' a building. Do they want to 'manage a property' in that 'old area they used to be in'? Aside from the operational/cash flow issues, it wonks up the companies metrics as well. This 'big ball of assets' can distort all the reporting metrics. Companies really don't want to 'own' anything unless it's a totally core thing to their experience. Long-term leases can be negotiated with future pricing in mind. Think Hotels: Four Seasons and Fairmont don't even own most of their hotels! They get big, long-term funds (think Saudi sovereign funds) to buy the real estate, and then sing a super long term lease-deals and then the hotel is really just an 'operating company' with those physical asset off the balance sheet. 'Owning property' is usually a fundamentally different business than whatever is going on inside the buildings. If you are a 'growth' company, your cash is almost always better used in your business. If you are a 'massive fund' (or a bank) that needs to park gazillions of dollars around the world long-term and you want fairly low risk but some kind of return - you buy property. Is one way to look at it.
paxy 9y ago
I'm sure a lot of them would if they could afford it.
chimtim 9y ago
1) managing an office building is a lot of hassle. 2) startups are always growing or shrinking. no point putting so much significant capital unless it is an established in for a long haul at a location where talent is surplus. 3) if you indeed have that much capital, you can pretty much dictate what you want and get some tax benefits (amazon, second HQ) or work with a city build a new building suitable for your long-term needs (apple). 4) not much inventory that meets your needs in SF market because the property prices are always going up. 5) the leasing company actually has limited leverage. finding another tenant esp. the size of dropbox is not easy. you can bin pack other tenants but you lose lot of money until all new tenants move in.
- morganvachon 9y ago
  "the leasing company actually has limited leverage" This can be true even at the SMB level. My employer sees only a couple of million in revenue yearly, we lease our warehouse/office space and we have more or less free reign to make any non-structural changes. If we decide to clear out a corner of the warehouse to put in more office space, we can (and we have). We just have to pay for the materials and labor. We've actually had our lease renewed on better terms over the years for being good tenants.
  - IgorPartola 9y ago
    The ability to modify stuff structurally (which isn’t really structurally but rather just the non-load bearing walls) is pretty standard in commercial leasing. Your employer isn’t getting anything special.
    - deelowe 9y ago
      Not only that, but the tenant is responsible for all maintenance and repairs.
      - icelancer 9y ago
        This is absolutely not the case in my buildings for our SMB that is in the single digit millions in revenue. We can make changes to non-load bearing structures and we are not on the hook for maintenance or repairs on the building.
calgaryeng 9y ago
For public companies that are covered by equity analysts, converting PP&E to OPEX is typically favorable from a valuation perspective.
ThrustVectoring 9y ago
For a lot of companies, it's a fast track to becoming a real estate holding company that happens to have an operating business attached to it. You want to focus your business operations on the kind of business you want to be - it's why it's very dangerous for a SaaS business to have a couple really big customers that get whatever features they want written. You wind up as a consulting shop, not a SaaS business. Target is a good example of this. It's a $32B company that owns $24B of real estate.
aquilaFiera 9y ago
You can also run into an issue like Zynga: they bought an office for a lot of money, had a downturn, and then were in the precarious position of having their office worth more than them. https://medium.com/halting-problem/zyngas-offices-now-worth-more-than-zynga-the-company-47a704d48249 https://medium.com/halting-problem/zyngas-offices-now-worth-...
- kristianp 9y ago
  I don't know if that's actually true. Halting problem seems to be a satirical blog: https://medium.com/halting-problem/tesla-announces-new-home-from-work-program-14ca1aaf90b1 https://medium.com/halting-problem/tesla-announces-new-home-...
ryanbertrand 9y ago
I believe Zynga owns their building.
Spooky23 9y ago
Operational expenses are deductible for tax purposes. Durable assets need to be depreciated.

imgabe 9y ago

The leasing company might not have as much leverage as you think. Finding another reliable tenant to take over that much space at once would not be easy. Most likely it would need to be split up into multiple tenants, which means they would need to pay for a certain amount of renovation. It would be much easier and cheaper to have the current tenant stay. Some companies own their own real estate, but that involves hiring a number of people dedicated to managing it. It might be more efficient to outsource that to a landlord. There are probably also tax implications to one or the other depending on the company's situation.

calvinbhai 9y ago

My guess: If they grow to be big enough, then they can move out at build their own campus. Equalises the leverage at that point. Also, the lease term will be for more than a few years (IMO 5-10) and that’s good enough time to figure out growing plans.

bkjelden 9y ago

There can be tax advantages to having your office space show up as an operating expense rather than a capital expenditure.

pfranz 9y ago

I worked at a larger company and I heard they sold their property and leased it back from them. I was told it was a liquidity thing. I imagine it lets you focus on your company and lets you be more flexible if you do need to upgrade or downgrade. When they lease a space, it's a contract, so they could put in favorable language for renewing the lease. Guinness brewery famously has a 9,000 year lease paying only £45 annually.

alexasmyths 9y ago

Buying a chunk of property is very cash expensive for a growth company. If you think about it - do you want to invest in 'real estate' or your 'high growth business'. And buildings are very expensive so it would be a huge amount of cash. And cash-flow is always an issue in a growth company. Of course, it would mostly be financed with a mortgage, but then you get into a weird balance sheet situation - massive asset, and if the company folds, or wants to move, what do you do with it? It's hard to just 'flip' a building. Do they want to 'manage a property' in that 'old area they used to be in'? Aside from the operational/cash flow issues, it wonks up the companies metrics as well. This 'big ball of assets' can distort all the reporting metrics. Companies really don't want to 'own' anything unless it's a totally core thing to their experience. Long-term leases can be negotiated with future pricing in mind. Think Hotels: Four Seasons and Fairmont don't even own most of their hotels! They get big, long-term funds (think Saudi sovereign funds) to buy the real estate, and then sing a super long term lease-deals and then the hotel is really just an 'operating company' with those physical asset off the balance sheet. 'Owning property' is usually a fundamentally different business than whatever is going on inside the buildings. If you are a 'growth' company, your cash is almost always better used in your business. If you are a 'massive fund' (or a bank) that needs to park gazillions of dollars around the world long-term and you want fairly low risk but some kind of return - you buy property. Is one way to look at it.

paxy 9y ago

I'm sure a lot of them would if they could afford it.

chimtim 9y ago

1) managing an office building is a lot of hassle. 2) startups are always growing or shrinking. no point putting so much significant capital unless it is an established in for a long haul at a location where talent is surplus. 3) if you indeed have that much capital, you can pretty much dictate what you want and get some tax benefits (amazon, second HQ) or work with a city build a new building suitable for your long-term needs (apple). 4) not much inventory that meets your needs in SF market because the property prices are always going up. 5) the leasing company actually has limited leverage. finding another tenant esp. the size of dropbox is not easy. you can bin pack other tenants but you lose lot of money until all new tenants move in.

morganvachon 9y ago
"the leasing company actually has limited leverage" This can be true even at the SMB level. My employer sees only a couple of million in revenue yearly, we lease our warehouse/office space and we have more or less free reign to make any non-structural changes. If we decide to clear out a corner of the warehouse to put in more office space, we can (and we have). We just have to pay for the materials and labor. We've actually had our lease renewed on better terms over the years for being good tenants.
- IgorPartola 9y ago
  The ability to modify stuff structurally (which isn’t really structurally but rather just the non-load bearing walls) is pretty standard in commercial leasing. Your employer isn’t getting anything special.
  - deelowe 9y ago
    Not only that, but the tenant is responsible for all maintenance and repairs.
    - icelancer 9y ago
      This is absolutely not the case in my buildings for our SMB that is in the single digit millions in revenue. We can make changes to non-load bearing structures and we are not on the hook for maintenance or repairs on the building.

calgaryeng 9y ago

For public companies that are covered by equity analysts, converting PP&E to OPEX is typically favorable from a valuation perspective.

ThrustVectoring 9y ago

For a lot of companies, it's a fast track to becoming a real estate holding company that happens to have an operating business attached to it. You want to focus your business operations on the kind of business you want to be - it's why it's very dangerous for a SaaS business to have a couple really big customers that get whatever features they want written. You wind up as a consulting shop, not a SaaS business. Target is a good example of this. It's a $32B company that owns $24B of real estate.

aquilaFiera 9y ago

You can also run into an issue like Zynga: they bought an office for a lot of money, had a downturn, and then were in the precarious position of having their office worth more than them. https://medium.com/halting-problem/zyngas-offices-now-worth-more-than-zynga-the-company-47a704d48249 https://medium.com/halting-problem/zyngas-offices-now-worth-...

kristianp 9y ago
I don't know if that's actually true. Halting problem seems to be a satirical blog: https://medium.com/halting-problem/tesla-announces-new-home-from-work-program-14ca1aaf90b1 https://medium.com/halting-problem/tesla-announces-new-home-...

ryanbertrand 9y ago

I believe Zynga owns their building.

Spooky23 9y ago

Operational expenses are deductible for tax purposes. Durable assets need to be depreciated.