Office Space, A Company’s Frontier: The Corporate Decision to Buy or Lease

Abstract

Markus Steuer, director of real estate at Drechtal Pharmaceuticals, must decide where his firm should locate in the immediate future. Drechtal was currently leasing space in seven different buildings, yet the company anticipated a dramatic increase in headcount should its first oncology drug, Trianoline, be approved by Swissmedic. The potential increased demand for space initiated Steuer's investigation of whether it was optimal to continue to lease space or whether or not it should invest in its own corporate headquarters. With its current leases set to expire over the coming 24 months, it was an opportune time to consider Drechtal's options.

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Resources

Exhibit 1: Drechtal Pharmaceuticals Income Statement and Balance Sheet (CHF in thousands, except share and per share amounts)

CONSOLIDATED STATEMENTS OF OPERATIONS

2014

2013

2012

Revenues:

Product revenues, net

1,261,829.70

0.00

0.00

Royalty revenues

66,369.91

40,133.79

37,580.64

Collaborative revenues

543,701.09

150,118.20

97,626.06

Total revenues

1,871,900.70

190,251.99

135,206.70

Costs and expenses:

Cost of product revenues

84,430.38

0.00

0.00

Royalty expenses

22,399.76

16,892.71

18,846.05

Research and development expenses

939,125.86

845,851.03

730,213.60

Sales, general and administrative expenses

531,756.77

249,210.60

172,764.78

Restructuring expense

2,752.20

1,991.83

8,280.48

Intangible asset impairment charge

140,396.60

0.00

9,554.40

Acquisition-related expenses

0.00

0.00

10,341.31

Total costs and expenses

1,720,861.56

1,113,946.17

950,000.63

Income (loss) from operations

151,039.14

−923,694.18

−814,793.92

Interest income

2,492.11

2,594.29

6,648.27

Interest expense

−51,025.80

−25,577.93

−17,505.78

Change in fair value of derivative instruments

−22,294.93

−54,710.88

−2,450.97

Loss on exchanges of convertible senior subordinated notes

0.00

0.00

−24,067.80

Income (loss) before provision for income taxes

80,210.52

−1,001,388.70

−852,170.21

Provision for income taxes

25,565.98

0.00

0.00

Net income (loss)

54,644.53

−1,001,388.70

−852,170.21

Net income (loss) per share

Basic

0.23

−4.43

−4.49

Diluted

0.21

−4.21

−4.39

Shares used in per share calculations:

Basic

241,870

225,933

189,914

Diluted

257,086

237,933

193,914

Source: Created by the author.

CONSOLIDATED BALANCE SHEET

2014

2013

Assets

Current assets:

Cash and cash equivalents

630,749.64

322,722.42

Marketable securities, available for sale

605,863.08

996,813.21

Restricted cash and cash equivalents

68,842.11

0.00

Accounts receivable, net

243,020.15

16,625.98

Inventories

149,194.61

0.00

Prepaid expenses and other current assets

19,757.70

17,382.37

Total current assets

1,717,427.29

1,353,543.98

Restricted cash

45,237.43

45,237.43

Property and equipment, net

176,724.55

95,985.89

Intangible assets

880,464.50

688,314.90

Goodwill

41,126.38

34,637.35

Other assets

14,952.64

22,800.51

Total assets

2,875,932.79

2,240,520.07

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable

99,049.93

47,574.28

Accrued expenses and other current liabilities

334,800.77

178,367.38

Accrued interest

4,462.70

4,594.07

Deferred revenues, current portion

59,764.10

99,019.41

Accrued restructuring expense, current portion

6,544.76

7,294.52

Secured notes (due 2012)

0.00

181,787.06

Liability related to sale of milestone payments

0.00

103,239.27

Income taxes payable (Alios)

16,023.53

0.00

Other obligations

0.00

8,161.05

Total current liabilities

520,645.80

630,037.04

Deferred revenues, excluding current portion

156,712.07

212,385.02

Accrued restructuring expense, excluding current portion

28,372.59

31,978.05

Convertible senior subordinated notes (due 2015)

530,800.00

530,800.00

Deferred tax liability

323,399.19

212,688.91

Construction financing obligation

74,245.65

0.00

Other liabilities

9,669.85

3,005.66

Total liabilities

1,643,845.14

1,620,894.67

Total shareholders’ equity

1,232,087.65

619,625.40

Total liabilities and shareholders’ equity

2,875,932.79

2,240,520.07

Source: Created by the author.

Exhibit 2: Drechtal’s Current Use of Space

Facility

Leased Area (sq. meters)

Functions Housed

Lease Expires

Rent (CHF per sq. meter per year)

Annual Rent (CHF)

Bürogebäude 1

15,000

Exec, Admin, Finance, HR

2016

400.00

6,000,000

Bürogebäude 2

14,000

Sales & Marketing, Operations

2016

330.00

4,620,000

Bürogebäude 3

11,500

Sales & Marketing

2017

345.00

3,967,500

Bürogebäude 4

9,500

Operations, IT

2017

280.00

2,660,000

Bürogebäude 5

4,500

IT

2016

290.00

1,305,000

Laborgebäude 1

6,500

R&D

2017

340.00

2,210,000

Laborgebäude 2

6,000

R&D

2018

370.00

2,220,000

Source: Created by the author.

Exhibit 3: Drechtal’s Employees in 2016

Function

Current Headcount

Admin

248

Sales & Marketing

451

Finance & HR

224

IT

247

Operations

402

R&D

345

Executive

34

Other

154

Total

2,105

Source: Created by the author.

Exhibit 4: Options

Option 1: Renew Current Leases
  • Renew leases for ten-year term; base rent increase of 5 percent in first year, and an additional 5 percent increase in Year 5
Option 2: Move And Consolidate
  • Consolidate offices into three larger buildings for lease in closer proximity to one another (but not adjacent)
  • Three buildings are class A, built in the last ten years; office buildings would be fully leased to the company; R&D building would be mostly leased, with remaining 5,000 square meters leased to a different biotech company
  • Gross lease with graduated rent: base rent at 430 CHF per square meter per year for a ten-year term, with a 5 percent increase in Year 5
  • Sub-lease space in current buildings whose leases have not expired at 5 percent discount to contracted rent for duration of lease

Facility

Leased Area (sq. meters)

Functions Housed

Lease Expires

Base Rent (CHF per sq. meter per year

Annual Rent (CHF)

Bürogebäude A

40,000

Exec, Admin, Finance, HR, Sales & Marketing

2026

430.00

17,200,000

Bürogebäude B

28,000

Sales & Marketing, Operations, IT

2026

430.00

12,040,000

Laborgebäude A

17,000

R&D

2026

430.00

7,310,000

Option 3: Buy New Headquarters
  • Consolidate offices through purchasing one main headquarters building
  • Building is class A, brand new, with top-of-the-line amenities and cutting-edge R&D facilities
  • Loan-to-value ratio of 70 percent; company to contribute all equity
  • Interest rate on mortgage is 1.2 percent; maturity is ten years, amortization is twenty years; monthly payments
  • Sub-lease space in current buildings whose leases have not expired at 5 percent discount to contracted rent for duration of lease

Facility

Area (sq. meters)

Functions Housed

Hauptsitz

100,000

All functions including R&D

Source: Created by the author.

Exhibit 5: Map of Options

Figure

Exhibit 6: Pharma Ownership of Commercial Real Estate

Commercial Real Estate Ownership Intensity For Pharma And Biotech Firms, By Country

Country

Bldg + Land as % of Assets: 2013–2014

Bldg + Land as % of Assets: 2008–2009

Change

N Size

Bermuda

16.3

17.6

−1.3

11

Canada

14.1

9.9

4.2

26

Cayman Islands

9.8

12.6

−2.8

26

China

16.3

18.9

−2.5

154

Egypt

14.0

7.5

6.5

10

Germany

13.8

13.6

0.2

13

India

16.4

14.4

2.0

132

Indonesia

14.9

14.4

0.5

10

Japan

26.7

28.1

−1.4

37

Korea, Republic of

23.7

26.4

−2.7

59

Malaysia

31.8

18.9

12.9

11

Switzerland

29.4

16.6

12.7

11

Taiwan, Province of China

30.5

27.3

3.2

40

United Kingdom of Great Britain and Northern Ireland

10.5

9.3

1.3

21

United States of America

8.6

12.0

−3.4

200

Vietnam

15.6

10.4

5.2

14

Grand total

16.0

16.1

−0.1

912

Source: Orbis.

Exhibit 7: Rental Prices in Basel as of Second Quarter 2015

COMMERCIAL OFFICE (CHF per sq. meter per year)

RESIDENTIAL (CHF per unit per month)

1 Bedroom Submarket

3 Bedroom Submarket

25th Quantile

50th Quantile

75th Quantile

Prime

25th Quantile

50th Quantile

75th Quantile

25th Quantile

50th Quantile

75th Quantile

City center

240

270

310

430

1,000

1,350

1,600

2,000

2,420

2,800

Breite/St. Alban

180

230

290

370

1,000

1,240

1,400

1,700

2,075

2,500

Gundeldingen

160

220

270

300

905

1,100

1,280

1,425

1,860

2,230

Bachletten/Gotthelf

200

230

280

300

910

1,120

1,290

1,400

1,875

2,245

Iselin

150

190

230

270

850

1,010

1,175

1,220

1,670

2,100

St. Johann

160

200

280

400

980

1,280

1,400

1,810

2,100

2,460

Kleinbasel West

170

220

250

330

950

1,140

1,350

1,500

1,960

2,345

Kleinbasel East

200

240

280

320

940

1,120

1,300

1,480

1,910

2,200

Bruderholz

180

230

250

250

1,050

1,330

1,550

2,100

2,335

2,670

Sources: JLL; Numbeo; Homegate; author’s calculations.

Figure

Exhibit 8: Commercial Real Estate Returns in Switzerland, 2014

1 Year

Annualized Total Returns (%)

Total Return (%)

Income Return (%)

Capital Growth (%)

3 Year

5 Year

10 Year

All Property

5.3

4.3

1.0

6.0

6.4

6.2

Retail

5.3

4.2

1.0

6.3

6.8

7.0

Office

4.2

4.4

−0.2

5.2

5.9

5.9

Industrial

4.8

5.2

−0.4

5.1

5.2

5.9

Residential

6.1

4.2

1.8

6.6

6.7

6.1

Other

4.1

4.2

−0.2

5.0

5.4

5.5

Source: 2014 IPD/Wuest & Partner Switzerland Annual Property Index.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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