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Old 04-29-2011, 03:03 AM   #1
Gedebelmmit
 
Join Date: Jan 2011
Location: Guatemala
Default Small Business: When do you build/buy, and when do you lease

We're anticipating anywhere from 80k to 280k in revenue in 08, but we're hoping to hire so most of the revenue will go toward that.

Offices in the area run for $12/Sq Ft annually (lease).

We're probably going to expand from 700 Sq Ft to ~1500-2000 Sq ft, so we're looking at around $1500-$2000 per month if we lease.

I've bought a house, so I'm familiar with closing costs and such... but I'm fairly clueless when it comes to commercial property.

Should I blow another 20 grand just to have an office next year?

What kind of overhead am I looking at if we build? We have good credit standing with some private investors, so a loan isn't out of the question.

Buying seems easy, but there'll obviously be the overhead of cleaning, roof leaks, etc. (Of course, this overhead to a lesser extent is also applied to building)

What's your experience, and what do you suggest?

I'd like to get this behind us so I can bury my head in visual studio where it belongs.
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Old 04-29-2011, 03:03 AM   #2
njyzwoja
 
Join Date: Jan 2011
Location: Canada
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This is a touchy subject for several reasons. The first of which being cash flow - if you anticipate a hiring binge, theres no reason BUYING an office or a property that will require substantial capital that will burn up the money you want to use for hiring which might not even be big enough if you grow faster than you expect.

You say "we expect X in revenue" - it's not about how much you have coming in on the top line, its about how much you have left at the end of the month after triple net.

A few things most people dont understand about commercial real estate:

1. It's not like renting a house. The A/C goes down and theres a $1000 repair bill, it's your problem and not the landlords.

2. That 6.25% you got on your first mortgage isnt even going to be in the ballpark on commercial real estate. Because you're in business to make money, the bank is going to take advantage of that. I would not expect a mortgage under 8.5%.

3. It's expensive. Really expensive. When stuff breaks, your life can become a headache.
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Old 04-29-2011, 03:04 AM   #3
lutouthBorp
 
Join Date: Jan 2011
Location: Panama
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I don't have enough information to recommend buying or building over leasing. But if you lease be very careful and you may want to hire someone experienced to look over the lease as I've seen more than a few people taken advantage of. Generally with a lease you will be responsible for everything inside the walls while the landlord is responsible for stuff outside the walls, but that is only a generalization. Good luck getting anything repaired after you sign the lease. It's worth it to have the HVAC evaluated and anything else that is the landlord's responsibility before actually signing. You'll have more leverage to get the repairs done before you sign.

Landlords like to skimp on HVAC and put in units that are way too small which means they will freeze up on hot days from working too hard, beware of this. Sometimes they will put the HVAC units in enclosed spaces (above the ceiling) and without ventilation they will supercool the immediate area and freeze up (I've had HVAC problems in every building I've been in).

Make sure you know who has responsibility for the parking lot. Know who is paying for the dumpster. Ask other tenants about the landlord and how they respond to emergencies or problems with other tenants. Sign the shortest lease you can. If you lease a freestanding building be prepared to have responsibility for the parking lot and landscaping. In the end, leasing is probably your best option unless you have some very specific reasons to buy or build.

That's all I can think of for the moment.
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Old 08-16-2011, 06:48 PM   #4
Miamihomes
 
Join Date: Aug 2011
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It is very difficult to give you an answer without more information. However, I would tell you that cash is king and that you might want to keep as much as you can instead of using it for an office building.
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Old 08-23-2011, 01:50 AM   #5
MrBrett
 
Join Date: Aug 2011
Default Cost of Capital

This is a good question. The quick answer is, "Put it off as long as humanly possible." (just as in any fixed expenditure) Don't feel the need to look business. Put off looking business and save the heck out of cash. That's what impresses the people worth impressing.

I am a commercial real estate broker and I do cost analysis for businesses from time to time. I look at their books and help them decide if they should buy, build, lease, or....if they currently own, sometimes sell and lease back.

In this day in age, a brick and mortar is less important, but it definitely gives you credibility and more importantly, traffic and ability to grow that top line. (at the expense of the bottom line if you over-buy)

A cost of capital investigation, in a nutshell, asks the business the over simplified question, "If you were given $10,000, where could you gain the highest return, investing in your real estate, or in your product." The rest of the analysis takes into account all the subjective decisions that come with ownership. There are several pros to owning, but IN COMMERCIAL REAL ESTATE, THE CHOICE OF WHETHER OR NOT TO OWN IS NOT AS SIMPLE. Home ownership has awesome tax benefits, but in commercial real estate, there aren't as many tax advantages because a lease payment is a tax deductible expense in your business. A good broker can help you get a lease that has a good deal of language to protect the tenant from unexpected expenses.

The best thing that I advise young businesses is, find a building that has some of the space being leased by a good business and move into the vacant space. When your business increases and you need more space, you can then consider booting the tenant (or better yet, find them space and buy it for them...$$$) and move into their space. While they are there, they subsidize your payment. (and sometimes bring you related traffic)

The best advice I can give you is to find a good real estate agent that has, or is studying to get, his or her CCIM. This affiliation is tough to get and they know their stuff. Get a young one and they're likely to work very hard to make you a client. (and if they're young they're more likely to have taken these courses more recently and forgotten less...haha)

Good luck.

Brett
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Old 11-03-2011, 05:31 AM   #6
rosaanniey
 
Join Date: Nov 2011
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Great stuff! Thanks for posting.
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