Lease or own: the corporate user's decision tree on industrial real estate

Leadership teams ask lease versus own as a binary. The CFO is on one side, the COO is on the other, and the real estate decision becomes a proxy for an internal debate about capital allocation. The binary framing is the wrong framing. The better question is which structure unlocks the capital plan you actually want to run, given your tax position, your operational flexibility needs, and your time horizon for the facility.

We’ve structured industrial deals across the full spectrum of these arrangements: long-term net leases with the developer as landlord, build-to-suit-to-purchase structures with predetermined purchase mechanics, ground leases where the corporate user owns the building but not the land, and post-completion sale-leasebacks where the corporate user takes occupancy on day one as a tenant. Each structure is the right answer for a specific kind of corporate user. None of them is the right answer for everyone.

What follows is the working framework. The headline: stop asking “lease or own” and start asking “which structure does the rest of my capital plan tell me I should be in.”

Why this question is harder than it looks

The lease-versus-own question is a stand-in for at least four underlying questions, and the right structure depends on the answers to all four.

First, what is your cost of capital, and what is the alternative use of the capital you would tie up in real estate ownership? If your business generates returns north of 20% on incremental investment, locking $30 million into industrial real estate that earns a real estate return is a significant opportunity cost. If your business generates returns closer to your real estate yield, the trade-off looks very different.

Second, what is your tax position? Depreciation on owned industrial real estate is a real cash benefit, but only against taxable income that can absorb it. A company that’s not generating consistent taxable income, or one that’s already shielded by other deductions, captures less of the value than a company in a stable tax position.

Third, what is your operational flexibility need? A long-term lease with a developer-as-landlord is a 15-to-20-year commitment, often with renewal options, but the building doesn’t follow you if your operations strategy shifts. Owned real estate is more committed than that. A sale-leaseback structure splits the difference.

Fourth, what is your time horizon for this specific facility? A facility you’ll be in for 30 years is a different decision from a facility you’ll be in for 10. Most corporate users assume the longer horizon and structure for the shorter one, or vice versa.

The right structure is the one that aligns the four answers. The wrong structure is the one that solves for the loudest voice in the room.

Long-term lease with the developer as owner

The default in most industrial build-to-suit transactions, and the right answer for many corporate users, is a long-term triple-net lease with the developer owning the building. We delivered the 600,000-square-foot facility at 4175 60th Street SE under this structure, with Proper Beverage Co. and Trane each taking long-term net leases on their roughly 300,000 square feet.

The structure works for corporate users whose capital plan rewards being asset-light. The capital that would have funded ownership stays in the operating business. The developer absorbs the construction risk, the lease-up risk, and the long-term real estate ownership risk. The tenant locks in a known occupancy cost for the lease term, with rent escalation negotiated at signing.

The trade-off is that the tenant gives up the optionality of owning the asset. Renewal options at fair market value are standard, but the tenant’s bargaining position at renewal depends on the alternatives available at that point in the market cycle. The other trade-off is that the tenant doesn’t capture the building’s appreciation, which over a 15-to-20-year hold on a well-located industrial asset can be substantial.

This structure is the right answer for capital-constrained growth-stage companies, for businesses where the operations leadership wants to maintain flexibility to relocate at the end of the term, and for businesses whose tax position doesn’t reward owning the depreciation.

Build-to-suit-to-purchase

A build-to-suit-to-purchase combines the developer’s ability to deliver the facility (entitlements, incentives, construction, capital structure) with the corporate user’s intent to own the asset at completion or after a defined period. The developer carries the project through construction. The corporate user purchases at a predetermined price or pricing mechanism (cost-plus, appraisal-based, or formula-based) at the end of the construction period or at the end of a defined hold.

The structure is more common than corporate users realize. We’ve structured BTS-to-purchase deals where the corporate user wanted the operational and tax benefits of ownership but didn’t have the in-house development capacity to actually deliver the building. The developer functions as a fee developer in substance, even though the deal documents look more like a real estate transaction. The result is an owned asset on day one of occupancy (or shortly thereafter), without the corporate user having to staff up a real estate development function.

The right answer for corporate users with a clear long-term commitment to the facility, a tax position that rewards depreciation, and a capital plan that can absorb the acquisition cost at closing.

Ground lease structures

In a ground lease structure, the corporate user owns the building but leases the land from a third-party landowner (often the developer, but sometimes a public partner like a port authority or a community development entity). The structure separates the financing and the tax treatment of the improvements from the long-term land economics.

Ground leases are useful for corporate users who want the depreciation on the building improvements (which they own) but don’t want to commit capital to the land underneath (which the landlord owns). They’re also useful in jurisdictions where land is held by a public partner, the port, the university, the city, that prefers to retain ownership of the land and lease it out long-term.

The complication is the ground lease term. A 50-to-99-year ground lease is functionally close to ownership but not identical. Financing the building improvements against a ground lease requires lender comfort with the ground lease terms, and the corporate user’s flexibility at the end of the term depends on what the ground lease says about renewal and reversion.

Sale-leaseback after delivery

A sale-leaseback turns an owned asset into a leased one after completion. The corporate user develops the building (or buys a build-to-suit from the developer at completion), then sells it to a real estate investor and signs a long-term lease back. The cash from the sale frees up capital for the operating business, the tenant locks in long-term occupancy, and the depreciation moves to the investor.

The structure is useful for corporate users who want the optionality of taking the build-to-suit project all the way through construction with ownership control, then converting to a tenant position once the building is delivered and the rent can be set against a stabilized asset. The sale-leaseback price is typically a function of the lease economics and the prevailing investor cap rate, which means the timing of the sale matters meaningfully.

Picking a structure: a working framework

The decision tree we walk corporate users through has four discrete questions, in order.

How long do you need the building? A facility you’ll be in for 25 to 30 years is in a different conversation than one you’ll be in for 10 to 12. The longer the horizon, the stronger the case for ownership or ownership-equivalent structures. The shorter the horizon, the stronger the case for a leased structure that lets you exit cleanly at the end.

Does your capital plan reward asset-light or asset-heavy? A growth-stage company allocating capital against operating expansion is asset-light by default. A mature company with stable cash flow and limited high-return reinvestment opportunities can afford to be asset-heavy. The CFO has a view on this. The view should be made explicit before the real estate decision is structured.

What’s your tax position? Depreciation matters if you have the taxable income to absorb it. Section 179 expensing, bonus depreciation, and the regular MACRS schedules on commercial real estate all assume there’s tax to offset. Companies in tax loss positions or those already heavily shielded should weight the depreciation lower than companies in stable tax positions.

What’s your operational flexibility need? The right answer is rarely “maximum flexibility” or “maximum commitment.” It’s some specific flexibility profile around lease renewal, expansion rights, contraction rights, or assignment rights that fits your operations plan. The structure should match the profile.

The right structure falls out of the four answers. The CFO who answers all four with “asset-light, no tax appetite, high flexibility need” lands on a long-term net lease. The COO who answers all four with “30-year commitment, stable tax position, low flexibility need” lands on a build-to-suit-to-purchase. The realistic case is somewhere in between, and the structure should reflect both perspectives, not the one that wins the meeting.

Closing

The answer to lease versus own is rarely the same one your CFO and your operations VP would write independently. The point of having a real estate partner involved early is to surface the trade-offs honestly, walk them through the decision tree with both sides of the table in the room, and end up with a structure that the company actually wants to be in for the life of the building.

If you’re scoping an industrial build-to-suit and want to walk through which structure fits your capital plan, get in touch. For the broader view, see our industrial build-to-suit capability page.