Building lease options/possibilities

[Howard]

Larry, there are definite operational advantages to owning your own business, I'll give you that. However, everything I have always said about owning the building financially still holds. It is not the right nor the best thing for everyone.

Let's say you own the building and other competitors come in and for whatever reason you can no longer make a go of the laundromat. Now you own a building that may need significant and costly modifications to make it usable for something else. You may or may not be able to rent it or sell it depending on the market. The value of the building may have gone down. You have tied up money in the building for years and did not have the use of that money. You are stuck paying property taxes, insurance and maintenance on the building that you can no longer use, rent or sell. Further, you could have used that money to buy more stores or make some other productive investment.

Separate from flexibility, the bottom line is the owning of the building is a separate investment and one that really has little to do with owning the store. You should evaluate that investment as a stand-alone venture and make an unemotional decision if you want to own a business that has a laundromat as a tenant.

[JamesD]

Touche Howard,

You beat me to it. I see that owning his real estate has worked out very well for Larry and others. If I had the opportunity to buy a piece of commercial real estate TODAY for the sole purpose of placing a mat in it, I'm not so sure that I would do that.

I like the future of the laundry business more now that I like the future of commercial real estate. Even though Larry has no vacancies, there are plenty around which further deflates the value of existing real estate and suppresses the future returns for future real estate indefinitely.

Howard and I have both said clearly that every situation is different. I think it is clear that commercial real estate in most areas of the US have at best a flat return for the foreseeable future.

If I have a choice between a flat return and an expected, significant double-digit return for a business, the choice will be the business for me!

[Adamski]

Originally Posted by JamesD

... If I have a choice between a flat return and an expected, significant double-digit return for a business, the choice will be the business for me!

James,

And therein lies the rub ... as Sherlock Holmes might say. Nobody really knows what the future will bring. It's entirely possible that the "expected, significant double-digit return" ends up negative and the "flat return" ends up double digit.

The real advantage of owning one's building is the elimination of Mr Landlord more than any expected return. The peace of mind knowing that you never have to negotiate a lease extension, have your rental rate increase or pay Mr Landlord a profit over and above his associated costs is PRICELESS. As far as the return goes ... it's likely to match the rate of inflation over time.

[Xiong]

Originally Posted by Howard

I think you have confused Mcdonalds with Sears/K-Mart. At least in the US almost all Mcdonalds are franchise stores.

last checking, sears/kmarts were that the corporation owns the business operation and the properties (land + building) were mostly leased...have they changed that to the corporation being the owner of the business operation as well as the property?

mcdonalds/711 are mostly franchised operations which all the properties are either owned by the franchisor or the franchisee. if the property is owned by the franchisor, then the franchisee owns the business operation and also pay lease payment/rent to the franchisor, plus the royalty commissions, cost of goods, etc... and i'm sure they haven't change this model.

besides, i have yet to see a mcdonalds/711 failed (closed down) yet but i've seen a few sears/kmart stores closed down.

[dbrown2508]

I'm with Larry on this one. I bought my store two years ago with 4 years left on the lease and 2 5 year options. Now the owner is musing that after my 12 years left has run out, he might sell to condos.

While that is many years down the line, it has caused me to rethink when (or if) I buy new equipment (it probably would be due for replacement 8 to 10 years from now). In fact, I'm now wondering if I should be selling sometime between now and when my leases plus options are up.

I would normally say you are better to be a renter than an owner. With the long term nature and investment in capital equipment, im not so sure.

Doug

[jh]

Thinking twice, I'm with Larry, too. If I decide to build a new mat or purchase an existing mat, it means that I believe there's a very good chance of success in the business. If I spend half million on this mat and actively manage it, why not spend, let say, another million to maximize the profit of this one opportunity?

It is true that now 1 million dollar is tied with this business. I could have spent this amount to invest another two mats that will reduce the risk. However, it takes time to find another good location. If the mat business goes well, I can always sell the property or the business, or both, if the price is right. Meanwhile, I can keep looking for the next opportunity.

Investing in the property also increases the chance of the success in the mat business. One question that many have asked me was, "How much do you pay for your rent?" I tend to think that these people were either my competitors, sent by my competitors, or the potential competitors who were looking around to build a mat or to purchase an existing one. What would they think if I answered, "NOTHING, I pay nothing for the rent. I can set the vend price to $0.25 per wash and still survive!" I agree with Larry that peace of mind is priceless. If there are only 5 years left in the lease but the place needs remodeling or a few machines need replacement, should I go ahead spend thousands of dollars on it if Mr. Landlord refuses to talk about a new lease? When there are only 10 years left in the lease, should I actively look for a buyer or continue to operate the mat, hoping that Mr. Landlord will sign a new lease? What if someone wants to buy the business with longer lease-year but the landlord increases the rent dramatically on the new lease because now the mat seems to be a gold mine? When I'm the business owner and Mr. Landlord, I will know for sure that every dime that I spent on keeping the mat in the best shape will not go to waste because of Mr. Landlord's decision. The additional investment that keeps the mat updated will increase the value of the business that will also increase the value of the property. If Mr. Landlord does not renew my lease, then it makes no sense to increase either value. When I decide not to update my mat, will I still have passion in the business? When I lose my passion, will my mat still be as successful? If the answer is no, then doesn't it mean that it costs me for not being Mr. Landlord? and such cost is not a small number.

[ldm]

Originally Posted by jh

Thinking twice, I'm with Larry, too. If I decide to build a new mat or purchase an existing mat, it means that I believe there's a very good chance of success in the business. If I spend half million on this mat and actively manage it, why not spend, let say, another million to maximize the profit of this one opportunity?

It is true that now 1 million dollar is tied with this business. I could have spent this amount to invest another two mats that will reduce the risk. However, it takes time to find another good location. If the mat business goes well, I can always sell the property or the business, or both, if the price is right. Meanwhile, I can keep looking for the next opportunity.

Investing in the property also increases the chance of the success in the mat business. One question that many have asked me was, "How much do you pay for your rent?" I tend to think that these people were either my competitors, sent by my competitors, or the potential competitors who were looking around to build a mat or to purchase an existing one. What would they think if I answered, "NOTHING, I pay nothing for the rent. I can set the vend price to $0.25 per wash and still survive!" I agree with Larry that peace of mind is priceless. If there are only 5 years left in the lease but the place needs remodeling or a few machines need replacement, should I go ahead spend thousands of dollars on it if Mr. Landlord refuses to talk about a new lease? When there are only 10 years left in the lease, should I actively look for a buyer or continue to operate the mat, hoping that Mr. Landlord will sign a new lease? What if someone wants to buy the business with longer lease-year but the landlord increases the rent dramatically on the new lease because now the mat seems to be a gold mine? When I'm the business owner and Mr. Landlord, I will know for sure that every dime that I spent on keeping the mat in the best shape will not go to waste because of Mr. Landlord's decision. The additional investment that keeps the mat updated will increase the value of the business that will also increase the value of the property. If Mr. Landlord does not renew my lease, then it makes no sense to increase either value. When I decide not to update my mat, will I still have passion in the business? When I lose my passion, will my mat still be as successful? If the answer is no, then doesn't it mean that it costs me for not being Mr. Landlord? and such cost is not a small number.

If you pay 1.5 million in your above scenario and set your vend price to .25 cents per wash, you will not survive as a stand alone business.

I buy the buildings where my small businesses are located, but I determine the values of the investments independently. Les

[Howard]

So you build a mat for $500K and buy the property for $1 million and two years later someone builds a 10,000 sqft mega mat only one block from you - now what? You mat starts to lose business so fast that the "tenant" stops paying you rent and the bank comes and forecloses and you lose everything. Or what about when the county comes and widens the road and now you no longer have any parking in front of your store? Or someone builds a huge building next to you and now you have no visability and customers can't find you.

When you own just the business you lose, when you own the property too you MEGA lose. Sure these things might not happen, but they might. Flexibility is great, but so is diversification of assets. You don't put all your eggs in one basket.

The other point is that in some areas of the country you can buy the building for not all that much money, while in other parts and major cities in many cases you cannot buy a building and in those that you can there is no way that a mat can pay the type of rent that would be required to give the property anything close to a fair return.

As I have said over and over there is no one size fits all answer to this question and it needs to be evaluated on a case-by-case, owner-by-owner basis.

[jh]

Howard,

Sure there is risk but let's not be scared off by the worst case. 500k isn't a small number. I consider it as a MEGA lose if the business doesn't go well. Let's look at the worst case of investing in multiple mats to split the risk - some people build a 10,000 sqft mega mat only one block from each location. Sure the possibility is much lower but hey, what is the possibility that someone builds a mega mat in the market, and it's only one block away, and it happens within two years? Like I said, if I don't want to tie additional 1 million dollars with the business, I can always seek the opportunity to sell the property alone when the business is in a good shape.

[Howard]

Originally Posted by jh

Howard,

Sure there is risk but let's not be scared off by the worst case. 500k isn't a small number. I consider it as a MEGA lose if the business doesn't go well. Let's look at the worst case of investing in multiple mats to split the risk - some people build a 10,000 sqft mega mat only one block from each location. Sure the possibility is much lower but hey, what is the possibility that someone builds a mega mat in the market, and it's only one block away, and it happens within two years? Like I said, if I don't want to tie additional 1 million dollars with the business, I can always seek the opportunity to sell the property alone when the business is in a good shape.

Its called diversification of risk. Sure it might not happen, but it might. You say sure you could sell the property - but maybe not. If the mat is sucking wind you would have a hard time to find a buyer that would be locked into the lease with the mat. Further, it might cost that buyer a lot of money to get rid of the mat and rehab the building for another tenant. Have you seen all the empty store around lately? You might not be able to sell period! You have to remember that real estate is not a liquid asset and does not have price that is quoted daily.

I am not saying you should not buy a building, I am not saying it might not be a good investment either. What I am saying is that it has risks and should be a separate investment decision. If your sole reason is that you don't want to deal with a landlord it is probably a bad reason to make such a large investment.