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Calculations of the cost of money can be complete without taking into account the company's tax consequences. If a company sells property to an investor and leases it back, it will have a taxable gain should the price of the property exceed its adjusted tax basis. Under the 1986 tax act, the gain will be taxed at a 34% rate in most cases. On the other hand, if the company directly finances the property, it won't have to pay any tax, even if the amount of the financing is higher than the adjusted basis.

Furthermore, on selling the property, the company transfers the depreciation benefits to the investor. On a $10 million property, with $8 million attributable to the building, the annual depreciation deduction would be approximately $254,000, based on the new statutory period of 31-1/2 years. At the new tax act's 34% rate for corporate taxpayers, the deduction would be worth, on a current basis, about $86,000. The federal government would eventually recoup that tax saving when the property was sold. The company would, in effect, receive an interest-free loan from the government, and its true saving would be the interest it could earn on the $86,000 until it sold the property.

The annual tax benefits from depreciation might be worth far less than $86,000, though. The property might contain a large land component, which is not depreciable, or the company might have owned the property for several years before selling it to the investor, in which case it would probably have used up most of its depreciation deductions.

Tax savings from a rent-deferral structure could balance, in part, the loss of depreciation. If the company chose this approach, it could deduct the accrued rent currently, even though it hadn't made a corresponding outlay of cash.

Another important factor in lease-or-own decisions is the way the company will account for the transaction. If the company chose to buy, it would have to list the mortgage on its balance sheet as a long-term liability -- a situation that could, in most cases, be avoided by making a properly structured leasing arrangement.

The choice between owning and leasing comes, finally, down to the cost of money. The most serious drawback of leasing is uncertainty. That could loom large if, for example, the investor requires periodic adjustments in the rent based on inflation (perhaps in exchange for a lower fixed current return). But the company faces the same problem whenever it borrows on any basis other than a fixed rate of interest. And even in the case of a fixed rate, residuals are still unpredictable.

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