Better to Own or Rent?

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Well, that depends. If you live in Grand Rapids, you should probably buy; if you have a business in Grand Rapids, you should probably rent. If you live in the SF Bay Area, start praying.

Why the difference? Companies that rent don't have to show their rent lease as a liability.

So what? To start with, it understates the debt a business has and therefore understates the risks it faces.

Do companies sell their buildings and lease the facilities back to hide their liabilities? Here are some examples on how businesses enter into arrangements on buildings, aircrafts and more from the Wall Street Journal:

• When UAL Corp., parent of United Airlines, filed for Chapter 11 bankruptcy protection in December 2002, its most recently audited balance sheet showed $25.2 billion of assets and $22.2 billion of liabilities. Not included: $24.5 billion in noncancellable operating-lease commitments, mostly for aircraft.

• US Airways Group Inc., which recently filed for Chapter 11 bankruptcy protection, showed only $3.15 billion in long-term debt on its most recently audited balance sheet, for 2003, and didn't include the $7.39 billion in operating-lease commitments it had on its fleet of passenger jets.

• Drugstore chain Walgreen Co. shows no debt on its balance sheet, but it is responsible for $19.3 billion of operating-lease payments mainly on stores over the next 25 years.

Read more:

How Leases Play A Shadowy Role In Accounting