Maria-Teresa Bosch-Badia, Joan Montllor-Serrats, Anna-Maria Panosa-Gubau and Maria-Antonia Tarrazon-Rodon
This paper aims to analyse the corporate rent-vs-buy decision on real estate through the trade-off theory and default option in the framework of a corporation that aims to…
Abstract
Purpose
This paper aims to analyse the corporate rent-vs-buy decision on real estate through the trade-off theory and default option in the framework of a corporation that aims to optimise its capital structure.
Design/methodology/approach
The methodological core of this paper comprises the trade-off theory that approaches the optimal capital structure by counterbalancing debt tax savings with bankruptcy costs. Impacts on the default option and the default barrier are made explicit. The paper also explores the practical applicability of the renting scenarios in the European context by examining the regimes of real estate investment trusts in different countries from the demand-side of commercial renting.
Findings
Analytical relationships with tax savings, bankruptcy costs, default option and default barrier are identified for the renting-vs-buying real estate decisions.
Research limitations/implications
The theoretical model assumes simplifications, such as constant debt, to make it operational. The paper centres exclusively on the trade-off capital structure theory.
Practical implications
This paper is an analysis of corporate real estate decisions together with capital structure. Applications are not only quantitative but also conceptual and strategic.
Originality/value
Identifying the main variables that govern the impact of corporate real estate decisions on capital structure and interweaving different approaches generates a conceptual framework that enlightens strategic thinking in this field.