Profiting from depressed real estate: in these challenging economic times, the own or lease space decision is front and center, as it's tempting to jump in and buy high-quality--often for pennies on the dollar. As beneficial as that may be long-term, due diligence is now especially key.

• Author: Olhasso, Mary Jane

In the uncertain economy, corporate America is making changes to ensure a more favorable bottom line. Workforces are being downsized, benefit programs are dwindling, human resource departments are foregoing merit increases and the work space is shrinking. And, it's not uncommon for procurement departments to be sending out letters to vendors requesting decreases in their service costs.

In addition, real estate departments across the country are not only asking landlords for rent concessions, but they are consolidating footprints. With this new era of lean operations, companies are forced to work harder with less and find new and creative ways to save limited resources. At this time, many organizations are considering the benefits of real-estate ownership. But, there are several things to consider before making a sound investment.

Redefining the Lease

The Financial Accounting Standards Board often re-evaluates accounting standards as real estate trends evolve. Financial Accounting Standards Statement No. 13 (FAS 13) discusses how leases of real property are treated on the income statement. On March 19, a Discussion Paper was jointly published by FASB and the International Accounting Standards Board proposing an amendment to how operating leases are recorded.

It states that a company must "Estimate the expected lease term and the expected (i.e., probability weighted) cash payments to be made by the lessee; and discount the expected cash payments at the lessee's incremental borrowing rate." Essentially, leases would now be viewed as similar to "owning an asset." Thus, companies now have even more incentive to purchase real estate.

Current Economic Conditions

Though funding remains a challenge, there are opportunities to purchase real estate for pennies on the dollar. According to a report from Marcus & Millichap, a national commercial real estate brokerage firm, the gap between the buyer and seller--which is narrowing--is encouraging more activity.

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Historically, owners have been reluctant to decrease their price because they believed the market would turn around sooner than later. Since that is not the current market reality, the gap that had existed between buyers and sellers is minimizing, in favor of the buyer. Cap rates for properties are forecast to exceed 8 percent in 2009 as more sellers adjust their prices to meet market expectations.

Buyers that do not take advantage of the reduced bidding climate may miss...