5 ms·

Why does a company that is worth more that 20 billion dollars rent property in the first place? If, as others have said, the total value of the lease was $440 m

by fergie 6y ago

Why does a company that is worth more that 20 billion dollars rent property in the first place? If, as others have said, the total value of the lease was $440 million, surely its better to hire people to buy and run an office building?

engineeringwoke 6y ago
Operational complexity for one? Their business isn't managing office buildings
- sumtechguy 6y ago
  Another is laws about employment. Is the guy who empties the trash can an employee of the building or the company who leases the space. That can mean different levels of what has to be offered to that janitor. As the mega corp could be 200k people and need to offer X benefits by law the building owner has it broken out into a REIT and the guy works for a 50 person employee shop and has Y benefits.
bArray 6y ago
The same reason you might use a VPS rather than build your own cloud infrastructure - sure you might save some money, but maintenance is then your problem, scaling down or up is harder and you lose flexibility to move provider. Also there might be some tax incentive if you can put the building down as an ongoing cost to your company.
unixfg 6y ago
Economy of scale in property managment probably meant that just having the whole thing as opex made sense. I don't imagine they'd be much better off now if they owned it and had to sell it off, might even have to take a comparable loss in such a case.
shajznnckfke 6y ago
Most likely a prop 13 issue. Property taxes don’t go up in California unless you sell, since 1978, which means a lot of people are still paying what they paid in '78. Goes for commercial too, not just poor grandma eating cat food with all that equity in her Beverly Hills cottage. All the big towers are leased. I heard it’s downright byzantine, with many layers of 99-year subleases. Good deal for the lawyers, and for the landlords! Some professional would lose a license for malpractice if they sold. By the way, it’s not just SF, it’s also the big chunks of the valley. The Facebook sign still says Sun on the back, and the Googleplex land is on lease from NASA. Question I’d like to know the answer to: who owns the land at Apple Park? This law is enshrined in that fine document the California constitution, and can only be repealed by a simple majority of voters. Voters who own homes, or live for free in a home someone owns, or pay rent to live in a home someone owns.
- poof131 6y ago
  The commercial property aspect of Prop 13 is actually up for a vote in Prop 15, to repeal these tax breaks for commercial property over $3M. It’s interesting to see people come out of the woodwork railing against it for all sorts of reasons from how the money is distributed to claiming it will cost the state hundreds of thousands of jobs. Would be nice to see this archaic tax relic go away. It’s like the state has granted feudal land rights to certain property owners.
adventured 6y ago
> Why does a company that is worth more that 20 billion dollars rent property in the first place? Market cap often isn't a good metric for how large a company is operationally, nor a great indicator of its operational needs. This is especially true right now, given that valuations are often quite inflated. Pinterest is worth $21 billion, however they only have 2,400 employees. Shopify is worth $124 billion. They have ~5,000 employees. Target is worth $75 billion and has 368,000 employees. 3M is worth $94 billion and has 96,000 employees. IBM is worth $111 billion and has 356,000 employees. GE is worth $57 billion with 205,000 employees. And so on. Then there is Visa, worth $473b, more than the valuation of all the publicly traded banks in the EU. Only 19,500 employees and comical margins (67% operating income margin, extreme to say the least). Versus, say, Wells Fargo with a $101b market cap and 265,000 employees. Obviously very different businesses within the financial world, however that's the point. Or AMD, worth $100b, with close to 20,000 employees. Intel has 110,000 employees with a $214b market cap. Intel's operating business is ten times larger than AMD (one assumes AMD will enjoy increasing economies of scale from their products as they continue to grow). The market cap just typically doesn't tell you enough about the operations of a business to give you great insight into its office needs.
- calpaterson 6y ago
  Agreed though it would be a better illustration to add outstanding debt to market cap to get a sense of the size of the company. Some companies (like GE I assume) are largely financed by debt and not by equity and it makes them look considerably smaller in terms of net assets than they really are.
eldavido 6y ago
Cost and type of capital. Office buildings are funded with mountains of cheap debt. Pinterest is funded mostly with equity. Maybe debt later when the growth is more stable but mostly equity. Financially, equity is jet fuel. It's expensive and you use it to build startups, movies, and other intangible-heavy things. Real estate debt is more like gasoline or diesel. There's a lot more of it than jet fuel, it's cheaper, and lower-quality/energy. If you try to run a gasoline engine (office space) on jet fuel, you'd likely destroy it and would definitely waste money putting something of too high a "grade" into the engine. Likewise, you can't run a jet engine (startup) on diesel. It won't run. Getting back to the question at hand, it's more efficient to run the offices on cheap real estate funding, and have the Pinterest operating company lease the asset, than have it own the office directly. Sometimes companies will buy offices themselves (like Apple) but it's something investors put up with, not encourage.
petercooper 6y ago
Don't know what the US is like, but here in the UK my company could afford to buy property but rents instead because you can deduct all of your rent against profits, whereas if you buy a commercial property the write downs are terrible and spread over too far a horizon.
- Daniel_sk 6y ago
  Yes, this is the same in Slovakia - the write downs for office/administrative buildings are spread to 40 years, which is ridiculous.
Reedx 6y ago
Zynga bought their office building and ended up being one of their best investments. Good timing though, buying in 2012 and selling in 2019. "Zynga to Make $369 Million on Sale of Headquarters. That's far more than the company has ever made selling mobile games." https://www.fool.com/investing/2019/05/29/zynga-to-make-369-million-on-sale-of-headquarters.aspx https://www.fool.com/investing/2019/05/29/zynga-to-make-369-...
shagie 6y ago
Owning property ties up capital. All that money is tied up in that land and that building. That money can't then be used to grow the business in other ways. Owning and managing physical property isn't what a tech company is good at. Some of the really big companies might own some of their buildings completely... but I feel confident in saying that most don't. Owning and managing a physical property means also having staff that does maintenance, grounds keeping, electrical, plumbing, deals with the accounting on taxes, etc... That isn't party of the core competency of the tech company. If anything, it distracts the company from its revenue. A company that I worked at in the late '90s and '00s in Sunnyvale bought the land, built the buildings... and then immediately turned around and sold them to a property management company and leased it back from them.
drdec 6y ago
If they had purchased a building years ago now they would be stuck with it as the market turns south and they have no need for it. This scenario is actually a good argument for a company keeping to its core competencies and not letting non-core activities drag them down.

by fergie 6y ago

engineeringwoke 6y ago

Operational complexity for one? Their business isn't managing office buildings

sumtechguy 6y ago
Another is laws about employment. Is the guy who empties the trash can an employee of the building or the company who leases the space. That can mean different levels of what has to be offered to that janitor. As the mega corp could be 200k people and need to offer X benefits by law the building owner has it broken out into a REIT and the guy works for a 50 person employee shop and has Y benefits.

bArray 6y ago

The same reason you might use a VPS rather than build your own cloud infrastructure - sure you might save some money, but maintenance is then your problem, scaling down or up is harder and you lose flexibility to move provider. Also there might be some tax incentive if you can put the building down as an ongoing cost to your company.

unixfg 6y ago

Economy of scale in property managment probably meant that just having the whole thing as opex made sense. I don't imagine they'd be much better off now if they owned it and had to sell it off, might even have to take a comparable loss in such a case.

shajznnckfke 6y ago

Most likely a prop 13 issue. Property taxes don’t go up in California unless you sell, since 1978, which means a lot of people are still paying what they paid in '78. Goes for commercial too, not just poor grandma eating cat food with all that equity in her Beverly Hills cottage. All the big towers are leased. I heard it’s downright byzantine, with many layers of 99-year subleases. Good deal for the lawyers, and for the landlords! Some professional would lose a license for malpractice if they sold. By the way, it’s not just SF, it’s also the big chunks of the valley. The Facebook sign still says Sun on the back, and the Googleplex land is on lease from NASA. Question I’d like to know the answer to: who owns the land at Apple Park? This law is enshrined in that fine document the California constitution, and can only be repealed by a simple majority of voters. Voters who own homes, or live for free in a home someone owns, or pay rent to live in a home someone owns.

poof131 6y ago
The commercial property aspect of Prop 13 is actually up for a vote in Prop 15, to repeal these tax breaks for commercial property over $3M. It’s interesting to see people come out of the woodwork railing against it for all sorts of reasons from how the money is distributed to claiming it will cost the state hundreds of thousands of jobs. Would be nice to see this archaic tax relic go away. It’s like the state has granted feudal land rights to certain property owners.

adventured 6y ago

> Why does a company that is worth more that 20 billion dollars rent property in the first place? Market cap often isn't a good metric for how large a company is operationally, nor a great indicator of its operational needs. This is especially true right now, given that valuations are often quite inflated. Pinterest is worth $21 billion, however they only have 2,400 employees. Shopify is worth $124 billion. They have ~5,000 employees. Target is worth $75 billion and has 368,000 employees. 3M is worth $94 billion and has 96,000 employees. IBM is worth $111 billion and has 356,000 employees. GE is worth $57 billion with 205,000 employees. And so on. Then there is Visa, worth $473b, more than the valuation of all the publicly traded banks in the EU. Only 19,500 employees and comical margins (67% operating income margin, extreme to say the least). Versus, say, Wells Fargo with a $101b market cap and 265,000 employees. Obviously very different businesses within the financial world, however that's the point. Or AMD, worth $100b, with close to 20,000 employees. Intel has 110,000 employees with a $214b market cap. Intel's operating business is ten times larger than AMD (one assumes AMD will enjoy increasing economies of scale from their products as they continue to grow). The market cap just typically doesn't tell you enough about the operations of a business to give you great insight into its office needs.

calpaterson 6y ago
Agreed though it would be a better illustration to add outstanding debt to market cap to get a sense of the size of the company. Some companies (like GE I assume) are largely financed by debt and not by equity and it makes them look considerably smaller in terms of net assets than they really are.

eldavido 6y ago

Cost and type of capital. Office buildings are funded with mountains of cheap debt. Pinterest is funded mostly with equity. Maybe debt later when the growth is more stable but mostly equity. Financially, equity is jet fuel. It's expensive and you use it to build startups, movies, and other intangible-heavy things. Real estate debt is more like gasoline or diesel. There's a lot more of it than jet fuel, it's cheaper, and lower-quality/energy. If you try to run a gasoline engine (office space) on jet fuel, you'd likely destroy it and would definitely waste money putting something of too high a "grade" into the engine. Likewise, you can't run a jet engine (startup) on diesel. It won't run. Getting back to the question at hand, it's more efficient to run the offices on cheap real estate funding, and have the Pinterest operating company lease the asset, than have it own the office directly. Sometimes companies will buy offices themselves (like Apple) but it's something investors put up with, not encourage.

petercooper 6y ago

Don't know what the US is like, but here in the UK my company could afford to buy property but rents instead because you can deduct all of your rent against profits, whereas if you buy a commercial property the write downs are terrible and spread over too far a horizon.

Daniel_sk 6y ago
Yes, this is the same in Slovakia - the write downs for office/administrative buildings are spread to 40 years, which is ridiculous.

Reedx 6y ago

Zynga bought their office building and ended up being one of their best investments. Good timing though, buying in 2012 and selling in 2019. "Zynga to Make $369 Million on Sale of Headquarters. That's far more than the company has ever made selling mobile games." https://www.fool.com/investing/2019/05/29/zynga-to-make-369-million-on-sale-of-headquarters.aspx https://www.fool.com/investing/2019/05/29/zynga-to-make-369-...

shagie 6y ago

Owning property ties up capital. All that money is tied up in that land and that building. That money can't then be used to grow the business in other ways. Owning and managing physical property isn't what a tech company is good at. Some of the really big companies might own some of their buildings completely... but I feel confident in saying that most don't. Owning and managing a physical property means also having staff that does maintenance, grounds keeping, electrical, plumbing, deals with the accounting on taxes, etc... That isn't party of the core competency of the tech company. If anything, it distracts the company from its revenue. A company that I worked at in the late '90s and '00s in Sunnyvale bought the land, built the buildings... and then immediately turned around and sold them to a property management company and leased it back from them.

drdec 6y ago

If they had purchased a building years ago now they would be stuck with it as the market turns south and they have no need for it. This scenario is actually a good argument for a company keeping to its core competencies and not letting non-core activities drag them down.