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Corporate Strategic Financial Planning
Marvin Tanner
Vice President, Silicon Networks
June 22, 2006

Abstract

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 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:

Data extracted on: June 11, 2006 (4:52:17 PM)

Consumer Price Index - All Urban Consumers

     The Consumer Price Index for 2001 to 2005 increased on the average of 2.47 percent.  This is an indicator in the decrease in value of the U.S. Dollar in purchasing power.  Examining the Dow Jones Industrials Stocks for the same period, there is a cumulative increase of 2.18% for five years, or less than the Consumer Price Index. 

        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://remcor.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