Some friends have recently come to me with a proposal regarding a piece of industrial real estate they’re interested in working on. Essentially they want to put together a biz-model that involves buying a 6000 sqr foot building (down-payment made by investors, mortgage & taxes paid monthly with revenue) that will be a multi-purpose art space/nightclub dealie.
My Q is regarding how rational/standard it is for a start-up buisness to attempt to buy the property they’re to be working out of.
Could it make sense? Or is the rule-of-thumb such that only established companies buy property?
Can you afford to lose the money you’re being asked to invest? That’s always a question to be answered. Next, have they investigated zoning regulations for the building? Can it even be used as a nightclub or gallery? What condition is the building in? What was its prior usage? Dangers of Hazardous Materials contamination? How do you obtain a cabaret license in your city? Liquor license?
There are just too many factors to be considered before your question can be answered here. If you are not savvy in such matters, then you need to get a lawyer. You must set up a business to handle something like this, be it a corporation, partnership or other model. Relying on friends to remain friends if things begin going bad, or even very good, is naive.
Cillasi: Thanks very much for your info. Perhaps I didn’t phrase my query clearly…I realize that there are a great many factors involved in this whole gambit but what I was hoping to ascertain is the viability of purchasing property versus just leasing.
Is it extremely unorthodox for a start-up to buy a building?
my completely WAG but not factoring in property price changes, all the associated fees from buying a building is going to be around a years worth of rent, thus, its more profitable to buy if you stay for more than 1 year (actual numbers may vary). Given that a huge number of buisnesses fail within the first year, it would be better to wait out till about the 3 - 5 year mark before considering buying.
Also, many small businesses start out incredibly cash poor and I think the average figure is 5 years before they start making a profit. During this time, your going to need every penny of liquid asset you can scrape up so dumping money into land probably isn’t the best thing for cashflow.
The advantage of buying would be the flexibility to renovate according to the needs of the business, without waiting for approval from the lessor. I would guess that organizing the interior of the building is important for a ‘nightclub/art space dealie.’
The disadvantage is the greater amount of up front money and the risk of losing it all if the business fails and the property value goes down.
The most important question, IMHO: How much of their own money are your friends who are putting together the biz model risking?
Open the application, then go to Financial Analysis and then to “Buy / Lease / Rent Calculator”. Plug in all the numbers you have, and it can tell you the upsides and downsides of the property ownership in question.
As a hijack, it told me that I wouldn’t break even on buying my home versus renting an equivalently valuable property until the 7th year.
The above was provided in the interest of fighting ignorance.
My personal feeling is that due to the high failure rate of new small businesses, you would be better off renting. Unless, that is, this piece of real estate would be a good investment, your business plans notwithstanding. It would be kind of nice to be making money as a night club operator AND then be able to sell the property a few years down the road for a profit.
In a piece I read some years back in a business magazine, they covered the top reasons new businesses fail, according to the failed business owners. The number two and number one reasons were “Not enough working capital to get the business out of start-up phase and into the black” and “Not enough industry experience”.
A good business plan and an interested banker can help you with the latter. If your business partners have never worked in the industry, I would RUN from this opportunity. If they’ve been at least the assistant manager in an establishment in the field in question, I might consider going forward.
There is nothing wrong in writing a business plan, then spending six months to two years gaining as much experience as you can working for someone who will be a future competitor.
I’m sorry if that was a hijack. I’ve seen small businesses fail and destroy men, women and families, and I hope what I just shared helps someone, even if not the OP.
Art gallaries and night-clubs rent space. The property owner has his own market and risk-tolerance and investment-lifecycle, and the gallary owner has his own. and those models are very different. There’s no advantage to do both.
