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Renting or Buying Commercial Property For Your Business

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steve schweitzer

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Hello Everyone, I have a question and would like some opinions.

As I discussed in a previous post, I am greatly expanding my vintage auto restoration and repair business and need a different facility.

The issue I am finding is basically no commercial landlord in our area will rent to anything automotive if it is in a nice area and if it is a nice building. I completely understand the reasoning behind that as the VAST majority or independent automotive repair shops and auto body shops are total shitholes with broke down cars and junk everywhere.

I need at least 5000 sf to start and as the business grows will need upwards of 10 - 15K sf within the next couple years (if not sooner).

Another serious consideration about renting a shop is that unless the building is already setup for automotive the buildout is REAL expensive (like 6 figures) and I HATE to put that into a rental building.

My biggest fear is getting all setup in a rental building and then having the property get sold and getting our lease torn up.

This happened to a friend a couple years ago. He had a really good auto body shop in a nice area. Been there for years with what he thought was a solid long term lease. Well, the person that owned the property died and the family decided the property was worth more than the auto body shop couple pay in rent (they were correct about this, nice corner lot in a great part of town) so they sold to Casey's General Store, gave him 30 days to vacate and then bulldozed his shop and put up a gas station. Keep in mind, he had what he thought was an iron clad lease but when it came right down it ended up being worthless.

I guess this all comes down to the Commandment Of Control. If you do not own it you are at the mercy of those that do, even in commercial rentals.

I know the other school of thought is that you should rent your businesses facility so you have the ability to move faster if needed and you do not have so much money tied up in property.

Anyone have any thoughts?
 

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OleksiyRybakov

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This question looks interesting. Recently I read the thread [1] and I think that it is more important to control rather than to own. What do you think about it? Let's say that you don't own the building but you have a contract with a landlord that prohibits them from evicting you. Do you still need to own the building?

[1] HOT TOPIC - I don't OWN it, I CONTROL it
 

steve schweitzer

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This question looks interesting. Recently I read the thread [1] and I think that it is more important to control rather than to own. What do you think about it? Let's say that you don't own the building but you have a contract with a landlord that prohibits them from evicting you. Do you still need to own the building?

[1] HOT TOPIC - I don't OWN it, I CONTROL it
Basically what you are describing is a commercial lease.

That gives some control but in the end, you do not own it and if the ownership changes then so does your lease contract sometimes
 

jdm667

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Hello Everyone, I have a question and would like some opinions.

As I discussed in a previous post, I am greatly expanding my vintage auto restoration and repair business and need a different facility.

The issue I am finding is basically no commercial landlord in our area will rent to anything automotive if it is in a nice area and if it is a nice building. I completely understand the reasoning behind that as the VAST majority or independent automotive repair shops and auto body shops are total shitholes with broke down cars and junk everywhere.

I need at least 5000 sf to start and as the business grows will need upwards of 10 - 15K sf within the next couple years (if not sooner).

Another serious consideration about renting a shop is that unless the building is already setup for automotive the buildout is REAL expensive (like 6 figures) and I HATE to put that into a rental building.

My biggest fear is getting all setup in a rental building and then having the property get sold and getting our lease torn up.

This happened to a friend a couple years ago. He had a really good auto body shop in a nice area. Been there for years with what he thought was a solid long term lease. Well, the person that owned the property died and the family decided the property was worth more than the auto body shop couple pay in rent (they were correct about this, nice corner lot in a great part of town) so they sold to Casey's General Store, gave him 30 days to vacate and then bulldozed his shop and put up a gas station. Keep in mind, he had what he thought was an iron clad lease but when it came right down it ended up being worthless.

I guess this all comes down to the Commandment Of Control. If you do not own it you are at the mercy of those that do, even in commercial rentals.

I know the other school of thought is that you should rent your businesses facility so you have the ability to move faster if needed and you do not have so much money tied up in property.

Anyone have any thoughts?
The core problem is that the landlord can kick you out. The solution is to be the landlord.

Buy a building (with space so you can grow into it later). Rent space to other businesses to help cover your costs.

For example, rent space to related businesses (auto upholstery, auto body, vehicle detailing, car dealership, auto hardware shop, car electronics installers, etc.)

You and the other businesses could refer customers to each other. The building would be a "one-stop shop" for people's automotive needs, making their lives easier.

If business is good, you can build an addition for yourself and the other tenants. Since you own the building, you can do it your way, on your terms and timeline.

When you retire, you can sell your auto business to someone else and stay on as landlord of the property (or sell the property to get a cash infusion).

For financing, it might help if you go to the bank with a detailed plan, including one or more businesses that have already expressed an interest in leasing space from you (that will be the legwork on this idea).

All of this might be more than you want to take on at this stage, but just throwing it out there.
 

WJK

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Hello Everyone, I have a question and would like some opinions.

As I discussed in a previous post, I am greatly expanding my vintage auto restoration and repair business and need a different facility.

The issue I am finding is basically no commercial landlord in our area will rent to anything automotive if it is in a nice area and if it is a nice building. I completely understand the reasoning behind that as the VAST majority or independent automotive repair shops and auto body shops are total shitholes with broke down cars and junk everywhere.

I need at least 5000 sf to start and as the business grows will need upwards of 10 - 15K sf within the next couple years (if not sooner).

Another serious consideration about renting a shop is that unless the building is already setup for automotive the buildout is REAL expensive (like 6 figures) and I HATE to put that into a rental building.

My biggest fear is getting all setup in a rental building and then having the property get sold and getting our lease torn up.

This happened to a friend a couple years ago. He had a really good auto body shop in a nice area. Been there for years with what he thought was a solid long term lease. Well, the person that owned the property died and the family decided the property was worth more than the auto body shop couple pay in rent (they were correct about this, nice corner lot in a great part of town) so they sold to Casey's General Store, gave him 30 days to vacate and then bulldozed his shop and put up a gas station. Keep in mind, he had what he thought was an iron clad lease but when it came right down it ended up being worthless.

I guess this all comes down to the Commandment Of Control. If you do not own it you are at the mercy of those that do, even in commercial rentals.

I know the other school of thought is that you should rent your businesses facility so you have the ability to move faster if needed and you do not have so much money tied up in property.

Anyone have any thoughts?
I'd buy if I was you -- if you can find the right building with the right zoning. A lot of Planning Department restrict auto repair facilities. Remember, the value of RE is location, location, location.
 

steve schweitzer

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Thank you for the replies. I pretty much figured that I would have to buy a building to get what I wanted.

The idea about having other auto related businesses in sort of a small "auto mall" sounds appealing too.

I really like the idea of having tenants paying down my commercial loan while I have a space on the property as well.

I have been in the auto repair industry my entire life and certainly know about zoning when it comes to shops. Been through that before.
 

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I’m on the rent side of this argument. Mostly from the standpoint that if you own a company, real estate isn’t your business, your operations are. I enjoy the flexibility of being able to upgrade easily add, or change facilities as the business needs change.

Yes, real estate is valuable, yes it could prove to be a good investment, I understand all of that. I guess I just compartmentalize the two of them. I believe the right real estate to be a great investment, but “investment right,” and our needs as entrepreneurs often don’t line up perfectly.

I know it’s popular for some to say “renting is wasting money” or “you don’t get anything for your money.” I don’t buy that. You get contractual control of a place to operate your business out of.

You are also more protected while leasing than you might think you are. My understanding is that it’s pretty tough for a new owner to just “tear up” your ongoing lease when you’re meeting your contractual obligations to remain in the property.
 
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Antifragile

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As someone whose business success depends on knowing good and bad leases, and knowing real estate… allow me chime in.

1. I agree with @Kak - leases are legally binding documents. You cannot tear up a lease with new ownership unless there is a clause that says so. You cannot tear up a lease for demolition unless there is a demolition clause etc. Your example of a friend who had “iron clad lease” and got screwed - his lease was landlord friendly, that’s all.
2. Ownership vs Lease. You should have the exact same difficulty with buying as leasing when it comes to “fitting in”. We just sold out our industrial project and I had rejected two offers: one from a recycling group and second from an auto repair shop. Both uses did not fit with the remaining tenants in our business park. It was not a question of “buy” or “lease” - just a pure “sorry, you don’t fit, please look elsewhere”.
3. Your decision to own real estate should be decoupled from your operating business decisions. What I mean is that most small businesses lease first and then when they are flush with cash, they buy. Why? To park capital, to invest etc. Yes, if you are going to open a specialized factory with millions invested into equipment, you may want to own right away (or still, sign a 20 year lease and go).

Contrary to the popular replies here, I think you should find a location that will accept your use first. Then spend the $10-$15k on a great lawyer to ensure your lease in good for you. Get to work growing your business.
 

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The important thing about business is if you are making money.

If you are just starting out, you should get the absolute BARE MINIMUM space that you need.

No fancy desks, no paintings in the lobby, no marble floors or even nice bathrooms.

You need exactly what is required for the business, at a price that’s low enough for you to make a profit, and you need to stick with that as long as you can until you OUTGROW it by necessity.

Always be wary of falling into the trap of buying things your business does not need.

Real estate will be good for your business - when it is ready for it.

@Antifragile is right. My post is basically all about his point #3

When your business is making good money, you have cash flow, it is relatively stable, THEN work on growing the balance sheet through assets like buildings and your footprint like that. And even then, remember: LEAN and MEAN
 

WJK

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Thank you for the replies. I pretty much figured that I would have to buy a building to get what I wanted.

The idea about having other auto related businesses in sort of a small "auto mall" sounds appealing too.

I really like the idea of having tenants paying down my commercial loan while I have a space on the property as well.

I have been in the auto repair industry my entire life and certainly know about zoning when it comes to shops. Been through that before.
I wonder if there are any used car lots or dealerships that are swinging in the wind right now. Car sales are down due to the lack of inventory. I bet there are some in your area that were over extended and were hit hard by these last 2 years. You might be able to pick a property on the cheap.
 
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James90

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@steve schweitzer

Hey Steve, Have you looked into subleasing a space or holding a master lease and subletting the extra space out?

Look for a space that's already set-up for your type of business, and if the space is too large tell the landlord you'll have the master lease, and sublet the rest of the space out. This can allow you to grow into your space, while making some passive income on the side...
 

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steve schweitzer

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Hello and thank you to all that replied.

I have found a building that is perfect for our use. It is already setup for automotive and is 8000 SF with an additional 5200 SF commercial building on the property. The total property is not quite 2 acres.

I checked and the zoning will support automotive repair and body shop activity.

This is an off market type situation and the owner is elderly (mid 80's) and wanting to structure a deal that will not cost him a huge capital gains. He mentioned owner finance but we have not talked numbers yet.

It is a really nice property with excellent road frontage and probably the highest traffic count in the area.

This is very exciting and scary at the same time as this will be an expensive piece of property but the upside is really good.
 

Antifragile

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Hello and thank you to all that replied.

I have found a building that is perfect for our use. It is already setup for automotive and is 8000 SF with an additional 5200 SF commercial building on the property. The total property is not quite 2 acres.

I checked and the zoning will support automotive repair and body shop activity.

This is an off market type situation and the owner is elderly (mid 80's) and wanting to structure a deal that will not cost him a huge capital gains. He mentioned owner finance but we have not talked numbers yet.

It is a really nice property with excellent road frontage and probably the highest traffic count in the area.

This is very exciting and scary at the same time as this will be an expensive piece of property but the upside is really good.
Awesome! Rooting for you!
Scary is good - it means you care and will be killing it.
 

steve schweitzer

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I met with the property owner today and feel very positive about this deal.

The property has 2 buildings. One that is 8000 sf and the other is 5600 sf.

The owner currently occupies the larger building and he uses it as a shop for his personal projects (he builds really high end race cars there).

The 5600 sf building is basically new and is only used for storage.

We decided that I should start by getting into the smaller building as I REALLY need a bigger shop NOW. He said it would take probably a year to get him moved out of the larger shop and we could take over that building then as well.

Keep in mind these buildings are right next to each other and share the same parking lot and road frontage.

The owner is elderly (mid 80's and is in somewhat failing health I just found out today). He is also a very wealthy individual and his main concern about selling is getting hit with huge capital gains taxes as the property is owned free and clear.

He is willing to sell me the complete property with both buildings owner financed but we still have lots of details to work out.

I am meeting with him again next week so I should have more details then.
 

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