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Can someone help me with the pros and cons of selling land vs leasing land under a 25 yr lease?

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Answers

Topic Expert
David Wittenberg
Title: Director of Financial Strategy
Company: World Vision
(Director of Financial Strategy , World Vision) |

Of course I have to start with the standard finance disclaimer "It Depends" (I can't help myself). But it's true; a complete answer lies in the specific needs and objectives of the current landowner and the parcel's current status and future potential.

I am assuming you are looking for justifications beyond an after-tax NPV analysis comparing the two alternatives, although estimates of the value of the land in 25 years is anyone's guess. Here are some generic considerations:

Pros for Selling (and cons for leasing)
- Immediate cash inflow if you need the cash or your capital budget is squeezed.

- You are not tying up cash in non-core assets. Invest your capital at what you are great at (and what your shareholders think they are investing in)

- Eliminate the distraction & risk: you will need to monitor the land to ensure you are receiving payments, the tenant is paying taxes, the tenant is not doing damage to the land. etc. That last one could be expensive. If the tenant spills toxins, pollutes the groundwater, and cannot afford the cleanup you may be on the hook.

Pros for Leasing (and cons for selling)
- Retain potential for reaping land appreciation if the combination of lease payments and the rise in the value of land exceeds your cost of capital. But you need to ask yourselves: Are we really smarter that the rest of the market?

- Retain control of the land for future use. 25 years is a long way out, but if there is reason to believe you will need land like this in 25 years and it will be difficult to secure at that time, it may be better to hold and lease. One could sell the land with an option to repurchase or a right of first refusal but, be aware, accounting rules may prohibit recognizing the transaction as a sale if you are retaining any interest such as options or a right of first refusal.

I suspect my bias shines through here. I am a disciple of shedding distractions and putting all resources and attention into what you are great at. However, you may have some situation-specific reasons that tip the scales to hold and lease.

One parting comment: We humans are funny -- research overwhelmingly demonstrates that we tend to over-value what we own simply because it is ours (See chapter 7 of Dan Ariely's "Predictably Irrational"). As such, be aware that your team is likely to be overly optimistic when estimating the land's value in 25 years.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Land ownership involves holding costs - taxes, guard service, landscaping, snow removal, utilities, local ordinance compliance, and the like. Leasing may make sense of rentals well exceed holding costs, but leave you in the landlord business. If that is a tangential business, and land is not a core asset, selling gives you cash to reduce debt or invest more profitably.

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