Location is Key to your Bottom Line
While there are many factors that impact the financial structure of a relocation/expansion project, location is always a foremost consideration.
As the process for making location decisions has become more complex over time, itâ€™s not surprising that financial strategies to support location decisions have also become more sophisticated. At its most basic, real estate finance still comes down to two fundamental choices: lease or own. But these days the factors that go into making an optimal decision go far beyond the fundamental.
In deciding to lease or own an asset, a company must consider financial and non-financial criteria. Financial criteria include occupancy cost, financing cost, balance sheet impact, profit-and-loss cost impact, credit risk, impact on earnings per share, and return on capital. Which financial criteria are most important depends on the relative importance a company places on measures such as economic value added, net present value, debt-to-capital ratios, minimum impacts on GAAP income in the first year and over the planning horizon, and EBITDA interest coverage.
Non-financial criteria include the extent of a facilityâ€™s importance to core business activities; characteristics of the property that favor owning or leasing, such as replacement cost or specific improvements; occupancy factors such as the length of the commitment and the need to control the environment; timing issues; and market factors such as the assetâ€™s value retention and the likely ease of disposition.
To help a company make an informed decision, a real estate financial consultant might devise a formula wherein various financial and non-financial criteria are given weightings based on their levels of importance to the companyâ€™s strategic goals, and then the relative costs of owning and leasing are calculated for each criteria to determine the best outcome.
The nature of the location has a significant impact on these calculations. As many executives recognize, location decisions typically involve competition for talent and a corporationâ€™s ability to identify the right labor pool to match its long-term business goals and objectives. This labor equation can be looked at as a spectrum of options ranging from higher-density, higher-cost options on one end (Tier 1 urban centers) to lower-density, lower-cost options on the other end (Tier 3 and 4 small markets). Especially in a downwardly trending economy, companies should look at multiple location alternatives and ask the question, â€śCan we get an equally talented labor pool for less money by locating in a Tier 2, 3, or 4 market?â€ť
Layered into the labor equation are also two other significant factors affecting the overall financial structure of the resulting real estate project: economic incentives and the flexibility of real estate options. A clear understanding of all of these factors will lead to a more informed, often smarter decision.