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MEMORANDUM <br />DATE: December 26, 1996 <br />TO: Mike Morrison, City Manager <br />FROM: Roger Larson, Finance Director <br />ITEM: LIQUOR STORE/LEASE VS PURCHASE ANALYSIS <br />Attached is an analysis of the current proposals for the new SAV II liquor store. The following <br />is a recap of the average cost per square foot of the three options: <br />1) Lease Proposal $ 9.66 <br />2) Purchase of Tires Plus building $ 9.48 <br />3) Purchase of Muffler Shop $11.79 <br />From a cost per square foot standpoint, the lease proposal and the purchase of the Tires Plus <br />building are relatively equal. However, ownership of the premises has advantages over a <br />lease /rent agreement (the value of property can significantly increase during ownership). <br />If St. Anthony were to purchase, the numbers indicate that the Tires Plus option is the most <br />favorable. The initial cash outlay of $570,000.00 (plus interest) can be recouped over the life <br />of the lease. In addition, rent proceeds exceed debt service payments by $185,331. This excess <br />revenue could be used to upgrade the current structure to insure increased value of the property. <br />Comparing lease and ownership arrangements: <br />1) Lease /Rent arrangement <br />A. Advantage is that the liquor operation avoids debt service payments, <br />interest charges, reserve funding requirements and issuance costs <br />associated with the issuance of $765,000.00 liquor revenue bonds. <br />B. Disadvantages are: 1) At the end of the lease you have no <br />equity and; 2) Retail leases often limit the tenants ability <br />expand, make site improvements or terminate the lease. <br />2) Ownership arrangement <br />A. Advantages include: 1) When the debt is retired, there is <br />equity or value in the property; 2) Ownership allows more <br />flexibility to make changes, expand or sell the existing site, <br />without third party approval. <br />