WALNUT CREEEK, CA—Many public companies have substantial sumsinvested in commercial real estate that it ownsand uses in their business. The real estate can be a headquartersoffice building, industrial warehouse property, retail store siteor restaurant building. Dillard's and Sears/Kmart, two departmentstore operators, own many of their own stores. Cracker Barrel, BobEvans Farms and Ruby Tuesday, three restaurant chains, also own alarge number of their restaurant buildings and sites. Zynga, theonline game maker that went public in December 2011, bought itsheadquarters building in San Francisco's South of MarketNeighborhood in 2012 for $228 million. Google, a technologycompany, bought its 2.9 million square foot New York headquartersbuilding in 2011 for $1.9 billion.

Commercial real estate is considered a capital intensive assetand includes four main property types, office buildings, retailcenters, industrial warehouses and apartment buildings. Each typeof property (except apartments) is subject to a lease contract thattypically has a base rent, additional rent for the propertyoperating costs like real estate taxes and maintenance, a term ofthree years to 10 years and options for renewal. The base rentalrate varies depending on the location and market of the property,age of the building, lease terms and credit of the tenant.

Does it make economic and investment sense for a publicoperating company to sink large amounts of capital in its own realestate like Zynga and Google? Should an operating company own orlease its real estate? From a return on capital perspective, theanswer is no. A public company should not tie up capital incommercial real estate whether it's used for office, industrial orretail purposes. Companies with large real estate holdings shouldsell the assets or do sale/leasebacks transactions unless theassets are of strategic importance or investment value. Somecompanies do need to own real estate for strategic and marketingpurposes. Examples are a retailer buying a building on Fifth Ave.in New York or Rodeo Dr. in Beverly Hills, CA for a new, highprofile store location to advertise its business or a companybuying a suburban office building for a national headquarters. Inmost other cases, the capital tied up in real estate should bereinvested into the company's core business where the rate ofreturn is greater than in a real estate investment.