A company is considering opening an office and is trying to decide if the new office should be owned or leased. The company will have to invest $2.5 million in office furniture, office equipment, and other up-front costs associated with opening the new office before considering the cost of owning or leasing the office space. This new office will allow the company to increase its annual sales by $2.5 million of which the cost of goods sold is expected to be 40% of sales and corporate overhead would increase by $300,000, not including the cost of either acquiring or leasing the office space.

Cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain the same level over a 15-year holding period. If purchased, the company will need $4.5 million as purchase price, where the company plans to invest $1.35 million in equity and finance the rest (70% LTV) with an interest-only loan at the rate of 4.5% that has a balloon payment due when the property is sold. The land value of the $4.5 million purchase price is $900,000 and the remainder is the building value which will be depreciated over 39 years. The company is in a 21% tax bracket.

The company can lease it alternately for $450,000 per year for a period of 15 years, with the company paying all the operating expenses. Operating expenses are estimated to be 50% of the annual lease payments. Estimates are that the property value will increase to $5 million at the end of 15 years. The after-tax cash flow from sale of the property at the end of year 15 is expected to be $1,454,231.

Suppose that five years ago the corporation decided to own rather than lease the real estate. Assume that it is now five years later and management is considering a sale-leaseback of the property. The property can be sold today for $4,850,000 with a capital gain tax of $170,423 and can be leased back at a rate of $450,000 per year on a 10-year lease. Assume that the cash flows from operations will remain the same level over the next 10 years as shown in the table below, and the property can be sold for $5.7 million instead of $5 million, 10-years later with a capital gain tax of $542,769.

What is the cost of obtaining financing with a sale-leaseback?

The own versus lease information can be summarized as below. Personal Property $2,500,000 $2,500,000 Own Lease $2,500,000 $1,000,000 $1,500,000 $2,500,000 $1,000,000 $1,500,000 $300,000 $225,000 $300,000 $225,000 $450,000 Sales Cost of Goods Sold Gross Income Operating Expenses Business Real Estate Lease Payments Interest Depreciation Taxable Income Tax Income After Tax Plus: Depreciation After-tax Cash Flow $141,750 $92,308 $740,942 $155,598 $585,344 $92,308 $677,652 $525,000 $110,250 $414,750 $414,750 Purchase Price Company's Investment Equity Sale Price in 15 Years ATCF Sale in Year 15 $4,500,000 $1,350,000 $5,000,000 $1,454,231 $4,850,000 Selling Price after 5 Years Capital Gains Tax on 5 Year Sale Lease Back Rate $170,423 $450,000 $5,700,000 Sale Price after 15 Years Capital Gains Tax on 15 Year Sale $542,769 How much would the corporation receive from a sale-leaseback? (round your final answer to whole number) The own versus lease information can be summarized as below. Personal Property $2,500,000 $2,500,000 Own Lease $2,500,000 $1,000,000 $1,500,000 $2,500,000 $1,000,000 $1,500,000 $300,000 $225,000 $300,000 $225,000 $450,000 Sales Cost of Goods Sold Gross Income Operating Expenses Business Real Estate Lease Payments Interest Depreciation Taxable Income Tax Income After Tax Plus: Depreciation After-tax Cash Flow $141,750 $92,308 $740,942 $155,598 $585,344 $92,308 $677,652 $525,000 $110,250 $414,750 $414,750 Purchase Price Company's Investment Equity Sale Price in 15 Years ATCF Sale in Year 15 $4,500,000 $1,350,000 $5,000,000 $1,454,231 $4,850,000 Selling Price after 5 Years Capital Gains Tax on 5 Year Sale Lease Back Rate $170,423 $450,000 $5,700,000 Sale Price after 15 Years Capital Gains Tax on 15 Year Sale $542,769 How much would the corporation receive from a sale-leaseback? (round your final answer to whole number)