Capital Lease Vs Operating Lease

Operating leases are similar to renting, while capital leases are more like a loan. Capital leases are where a lessor transfers all the risks and benefits of ownership for a property to the lessee. An operating lease does the opposite and does not transfer all the risks and benefits to the lessee. In addition to transferring risks and benefits, there are other qualifications to be classified as a capital lease. The lease must contain a bargain purchase option. It has to be equal to 75% or more of the estimated life of property. Also, the present value of the lease payments should be equal to 90% or more of the fair value of the property (Wahlen 2013). Target Corporation owns a total of 1802 stores and 40 distribution centers. Out of that amount,
Usually, there are no down payments for the building, and each of the lease payments qualify as an expense, which typically reduce taxable income and lower tax payments. Depending on the terms of the lease, the lessee may not have to pay for repairs and maintenance cost, which would save time and money for them. They would have less responsibility. The leasing process also takes less time than purchasing, so if the lessee needed to get the building up and running quickly, leasing would be a benefit to them. There is also more leasable commercial property than buildings for sale. The disadvantages of leasing are that there is no equity in the building, which is needed to have capital growth benefit to a company as the value of the building increases also. They are also subject to annual rent increases and have little control over the building they are leasing. However, if they purchase a building, they would have more space and income. They could lease the property to other businesses and generate income to cover your mortgage also. They would have total control over the building and more options to expand and enhance the space (Stafford
In 2016, the sales were $69,495 million, which was a decline from 2015 where Target had $73,785 million in sales. The income from operating activities also decreased to $2737 million in 2016 from $3363 in 2015 (Target 2017). These particular decreases could possibly be the reaction from political boycotts that surrounded Target the past year. There was a huge controversy over the Target’s new bathroom policy that was created for transgender individuals. Also, there are increasing competition with online retailers, such as Amazon, which may have played a part in the sales decline too. Overall, I think Target would be steady in sales over the next couple of years regardless of the minor issues. Therefore, I think that I would make the decision to go ahead and invest in Target