Problem $15-2$

The ABC Corporation is considering opening an office in a new market area that would allow it to increase its annual sales by $$2\mathrm{.}5$ million. The cost of goods sold is estimated to be $40$ percent of sales, and corporate overhead would increase by $$300,000,$ not including the cost of either acquiring or leasing office space. The corporation will have to invest $$2\mathrm{.}5$ million in office furniture, office equipment, and other up$-$front costs associated with opening the new office before considering the costs of owning or leasing the office space.

A small office building could be purchased for sole use by the corporation at a total price of $$4\mathrm{.}5$ million, of which $$900,000$ of the purchase price would represent land value, and $$3\mathrm{.}6$ million would represent building value. The cost of the building would be depreciated over $39$ years. The corporation is in a $21$ percent tax bracket. An investor is willing to purchase the same building and lease it to the corporation for $$450,000$ per year for a term of $15$ years, with the corporation paying all real estate operating expenses $($absolute net lease$).$ Real estate operating expenses are estimated to be $50$ percent of the lease payments. Estimates are that the property value will increase over the $15-$year lease term for a sale price of $$5\mathrm{.}0$ million at the end of the $15$ years. If the property is purchased, it would be financed with an interest$-$only mortgage for $$3,150,000$ at an interest rate of $4\mathrm{.}5$ percent with a balloon payment due after $15$ years.

Suppose that five years ago the corporation had 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$ and leased back at a rate of $$450,000$ per year on a $15-$year lease starting today. It was purchased five years ago for $$4\mathrm{.}5$ million. Assume that the property will be worth $$5\mathrm{.}7$ million at the end of the $15-$year lease.

Required:

a$.$ How much would the corporation receive from a sale$$leaseback of the property?

b$.$ What is the cost of obtaining financing with a sale$$leaseback$?$

c$.$ What is the return from continuing to own the property?