Introduction
The purpose of this business report is to analyze and discuss the advantages and disadvantages of leasing buildings, medical equipment and office furniture and equipment. This analysis should explain how the company will benefit (or lose) from selling its headquarters and leasing them back from the buyer.
It is essential to understand the pros and cons of such an action before embarking on it. Thus a professional investigation should reveal the advantages and disadvantages of selling and then leasing the company’s headquarters as opposed to maintaining them. Through understanding this breakdown, the management will be in a better position to decide whether to sell or maintain them.
Advantages
Leasing can be defined as the act of obtaining something (for example property, equipment, or building) from another person (the owner) for a specific period of time under a lease agreement and payment of lease charges. One benefit of leasing is that it trims down the cost of ownership of essential assets whose expenditure involves colossal amount of cash.
Through leasing, an individual can be able to finance many assets compared to purchasing only one brand new asset. Another advantage of leasing is that, one is relieved off the worry of disposing an asset once it is worn out.
All assets (except land) depreciate in value and become obsolete with time (Anon. “Advantages and disadvantages of lease financing for businesses”, 2005). The owner has to dispose off the assets that can no longer be used and obtain new ones. However, the person leasing the equipment is under no obligation liable for replacing the assets once they are worn out and leaves them as they are once the lease period is over.
Under leasing, one pays a fixed rate every month which is also inflation friendly. That is, as inflation rises the lease rate remains constant over a period of up to five years. Another advantage of leasing is that, one is able to utilize equipments by renting only the necessary equipments.
Once a lease period is over, a person can be able to upgrade with technology by leasing new equipments as opposed to owning old and outdated equipments which would be difficult or rather expensive to dispose and buy the new ones. Leasing also has tax benefits that depend on the structure of the lease (Anon. “Leasing in Business- advantages and disadvantages”, 2009).
Disadvantages
Leasing is a form of financing that is preferred by many businesses, although not all. Before leasing, certain things has to be put into consideration such as the type of equipment required, and the kind of business. Also one has to consider the tax implications between leasing and purchasing the equipment. One of the bad things about leasing is that it becomes expensive in the long run as opposed to owning the item.
In leasing one can rent an item over long periods of time and will never own the item (Wakelin, et al 2003). If the money spent on leasing can be accumulated it would by far be more than the actual money that would have been spent if the item was bought from the very start.
Another disadvantage is that, if the lease agreement is terminated before it expires, mainly because of damage, then the person leasing the item in question will be expected to pay additional charges on top of the lease charge. Not everyone can lease equipment, before being allowed to get any equipment through leasing; one has to prove credit worthiness and good employment history. This becomes an advantage for one who is buying the item since there are no qualifications that have to be met.
Sale of the Company’s Headquarters Building
One advantage the company stands to benefit from by selling its headquarters building is an increase in its current liquidity status which can be used to expand production. By leasing the building, the company will have to pay a small amount of money every month giving it a chance to expand the business and concentrate on more productive ventures.
Another advantage is that it will not have to lease the entire building but can lease some offices and utilize them for maximum production. By leasing, the company is not required to cater for depreciation but will only pay the lease charges as agreed irrespective of the period of time it remains on the leased building (Enterprise Financial solutions, Inc 2002).
One disadvantaged of selling the buildings is that, the company will receive a significant less amount of money than it had spent to put up the building or to purchase it when it was still new. By leasing the building, the company will not have equal rights over the building like before and will be expected to maintain it in a good condition.
The new owner has a right to terminate the lease agreement if the company messes around with it and will be expected to pay an additional charge to repair the building. In the long run, the company will pay a higher amount of money that the amount obtained at the time of sale (Spiritleo, 2010).
I would therefore advice the management of the company not to dispose the building because the long run benefits of maintaining it surpass the proceeds obtained from selling it. The building can also be used as collateral for borrowing loans from financial institutions which would otherwise be difficult if the company has no tangible assets.
Reference List
Anon. (2005). Advantages and disadvantages of lease financing for businesses. Allbusiness.com. Web.
Anon. (2009). Leasing in Business- advantages and disadvantages. Web.
Enterprise Financial solutions, Inc (2002). Advantages of leasing. Web.
Spiritleo (2010). Advantages and disadvantages of leasing. Web.
Wakelin, et al (2003). Leasing equipments for business. Web.