Corporate
vision, mission, goals, and objectives limit corporate strategic
finance. Traditional forms of corporate investment have been
limited to a mix of equities, bonds, and cash equivalences.
In today’s
market, real estate is an appropriate alternative investment.
Instead of riding the Dow Jones Industrials as the primary index
relative to stock portfolios, firms are addressing residential
real estate as an alternative investment.
Corporate
Strategic Financial Planning
Corporate
strategic financial planning is limited by investment objectives,
forecasting techniques, and misguided financial plan implementation.
Corporate financial plans evolve with the corporation over time.
As a case
study, consider the California’s Central Pacific Railway. During
the later part of the nineteenth century, the Central Pacific
Railway led the way in engineering techniques in building bridges
and tunnels for the continental railway across the United States.
Central Pacific
created the largest fleet of passenger ferries and freight services
in Oakland and San Francisco, California. In building this infrastructure,
Central Pacific purchased every inch of available land in Oakland
and San Francisco useable for maritime use (http://en.wikipedia.org/wiki/Southern_Pacific_Railroad).
In the early
part of the 20th century, Southern Pacific Industries purchased
Central Pacific, and continued expansion of railway construction
from basic transportation into vacation destinations such as National
Parks.
By the early
1930’s Southern Pacific maintained over 13,848 miles of right
of way from Portland, Oregon to Los Angeles and on to the East
to Phoenix, Houston and New Orleans, Louisiana.
As early as
1863, Central Pacific Railway was given land right of ways with
the exclusive permission to run telgraph wires and operate the
telegraph backbone. This grew into local phone service 1978 after
the Execunet II decision, Southern Pacific Communications was
allowed to become US. Sprint, and divesture of the baby bells
starting competition in the telecommunications market.
Southern Pacific
from the onset was a real estate and technology driven corporation.
In the 1950’s divesture allowed the tearing down of Central Pacific
Railway stations and replacing with hotels.
Southern Pacific
sold travel and Western National Parks through the monthly Sunset.
The magazine led into planned 1960’ communities, one for example
being San Francisco’s Park Merced. Hundreds of units in a scenic
park setting overlooking the city of San Francisco offered at
above market rates.
Southern Pacific
is an excellent example of corporate strategic investment in evolving
markets. Many firms do not maintain diverse portfolios, and park
surplus cash in bank CD’s, treasury bills, mutual funds, equities,
and perhaps repurchasing their own equities. Real estate should
be part of the corporate strategic growth plan.
For this analysis,
equities will be limited to the Dow Jones Industrial Index and
real estate investments will be limited to the Reno, Nevada market.
The time period for this study is limited to years 2001-2005,
inclusively. As a constant, the Consumer Price Index is included
in the evaluation.
The Consumer
Price Index measures the difference monthly in durable goods by
measuring how much $100 dollars (1967 Dollars) buys in products
in a retail store. For the years 2001-2005, the CPI index had
minimal increases:
Coumer Price Index - All Urban Consumers
Real estate
can be defined as residential or commercial. This analysis is
limited to the residential market, in Reno, Nevada. Typically,
cities four to five hours away from metropolitan areas have not
yet experience the rapid increase in real estate prices.
Demographics:
Reno is the site of the University of Nevada, Reno campus, and
has three main economic contributors: travel industry (casinos
and ski resorts at Mount Rose), the University community, and
warehousing/logistics/transportation (Central Pacific/Southern
Pacific railroad town).
Nevada has
no state income tax, or sales tax on sales made outside of Nevada.
Firms can cost effectively run warehousing in Reno with low cost
wages, access to direct transportation, and the availability to
high-speed telecommunications. According to the City
of Reno, Demographics per capita
personal income report:
·
Median
Household Income: $40,530
·
Median
Family Income: $49,582
·
Per
Capita Income: $25,038
·
Percent
of Population Below Poverty Level: 12.6%
·
Percent
of Population Making $100,000 per Year: 10.3%
The following
data obtained from the Reno
Board of Realtors in the form of Market
Statistics, All MLS, for 2001 to 2005:
The average
increase for residential real estate is 17% for the same time
period. It may be prudent for the corporation seeking an alternative
investment strategy to consider residential real estate.
There are
additional benefits is structuring part of the portfolio in residential
real estate. Eighty percent of the investment can be funded by
outside investors through a mortgage. In stocks and bonds, the
full price must be paid for within thirty days of purchase.
With stocks
and bonds, there are dividends. These are payment to certificate
holders on a regular basis. With rental properties, there may
be monthly checks from renters.
Real estate
is classified as a long-lived asset. Long-lived assets have a
depreciation span of 27.5 years. The property can be depreciated
against other income with a straight-line depreciation schedule
of about 3.5% of the purchase value per year.
The Reno,
Nevada market makes economic sense for investors that can manage
the property themselves; need to shield regular income through
deprecation; have the available cash for the down payment; can
wait at least five years before a 1031 exchange. The appraised
value will continue to rise, as Reno is far enough from metropolitan
areas not to have double-digit appreciation. At the end of five
years typical ARM Investment Programs have a balloon payment,
could necessitate refinancing or a 1031 exchange into another
property.
References
City of
Reno, Demograhics Study, http://www.cityofreno.com/res/demographics/
Reno MLS
Data Supplied by Jim Perry, Realtor and Associate Broker, Remcor
Real Estate, http://renoinvestmentrealtor.com
Wikipedia.org,
http://en.wikipedia.org/wiki/Southern_Pacific_Railroad
U.S. Department
of Labor, Bureau of Labor Statistics, Consumer Price Indexes
http://data.bls.gov/cgi-bin/surveymost
Marvin
Tanner is a published author, living in San Francisco. He
has co-authored Using Unix, Second Edition, Que Press,
1984. Mr. Tanner is a Ph.D. Student in marketing, and works
full time as a web optimization specialist. He has taught at
the University of California, Extended
Education, San Francisco
State College, Peralta
Community Colleges, and since 2001 has been facilitating
graduate workshops at the University Of
Phoenix in eBusiness and Marketing.