Purchasing real estate for coworking space

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Stephanie Miles

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May 17, 2015, 7:16:22 PM5/17/15
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Hello all. I'm new to the group, at the very beginning stages of opening a coworking space in Redding, CA. (pop. 90,000)

I'm considering buying a commercial space for my coworking business, rather than leasing. Obviously it's a big financial investment up front, however based on looking at the market here, it seems like the monthly payments on a commercial real estate loan would be less than the cost of a lease on a similarly sized space. (I'm looking at pretty run down industrial spaces, with the plan to renovate.)

Wondering if anyone else has done that and what unexpected issues, challenges, or even benefits you faced by doing so?

Jacob Sayles

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May 18, 2015, 11:59:06 AM5/18/15
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Sounds like a great idea!  I don't have a lot to add as I've never purchased a commercial building.  We lease the building that Office Nomads is in although we would love to buy it.  

Jacob

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Alex Hillman

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May 18, 2015, 12:19:19 PM5/18/15
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I dug up one previous conversation on purchasing vs renting:


I'll pop back here later with some longer-form thoughts!

-Alex


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The #1 mistake in community building is doing it by yourself.

Glen Ferguson

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May 18, 2015, 12:24:56 PM5/18/15
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We bought and renovated our building. I cc'd my wife who can give you more details as that's her area of experience (I'm the IT guy).

Keep in mind that while the loan payments may be less, you'll also have to figure in property taxes, repairs/improvements and other items that wouldn't be a part of a commercial lease (depending on the lease type, of course). Just make sure you do an apples to apples comparison when you're calculating the costs involved.

That being said, it does have the upside of not having to worry about things like a landlord tripling your lease because WeWork artificially inflated commercial property values in your area.


Glen Ferguson  
Address: 122 E Patrick St, Frederick, MD 21701

On Mon, May 18, 2015 at 11:59 AM, Jacob Sayles <ja...@officenomads.com> wrote:

Stephanie Miles

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May 19, 2015, 8:57:16 AM5/19/15
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Thank you for the insights! Glen, I hope your wife pops in with her thoughts, as well. We're still in the earliest stages, and I still need to run all the numbers (taxes, etc.), but the building we're looking at seems like such a great opportunity. I just wanted to make sure I wasn't missing a big piece of the puzzle here.

Elizabeth Trice

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May 19, 2015, 11:38:41 AM5/19/15
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Run the numbers, but sounds like a great idea if the numbers work. Another thought I've had is to switch to non-profit, as we currently pay more in property taxes than in staffing!

Craig Baute - Creative Density Coworking

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May 19, 2015, 11:54:39 AM5/19/15
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I am thinking of buying the property that Creative Density in Denver is in after four years. It's still not a straightforward question verse leasing because it would actually increase our expenses by about $1200 a month with taxes, etc. but it would lock in a steady set of expenses in our growing city. In two years when my lease is up I could see it increasing by $1200 anyways in rent if I didn't buy it.

I could also say that I wish I bought it four years ago in hindsight but back then I didn't know if the space would be right for the community, but now I know people like it and our community continues to steadily grow. Creative Density starting out as a lease echos the mantra here of don't do a 'build it and they will come.' I've tested out the space, I know it well, and I know it is in a good location for my community.

So I would take a step back and ask 'What does your community think of the space?' If you have their buy-in then it might make a great financial decision. If you find out that your space is not a good fit then you'll find yourself on an expensive endeavour as a commercial real estate owner without much experience. 

Stephanie Miles

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May 19, 2015, 12:19:03 PM5/19/15
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So I would take a step back and ask 'What does your community think of the space?' If you have their buy-in then it might make a great financial decision. If you find out that your space is not a good fit then you'll find yourself on an expensive endeavour as a commercial real estate owner without much experience.

That's exactly my fear. However, the other side of the coin is that we lease a space with no option to buy, and end up having to move locations a few years down the line when it's clear we have the buy-in. That would be a major expense, too, so it seems like there are upsides/downsides either way.



On Sunday, May 17, 2015 at 4:16:22 PM UTC-7, Stephanie Miles wrote:

Jerome Chang

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May 19, 2015, 12:29:47 PM5/19/15
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Have you enlisted a broker?
I typically sign leases 5-10 years, plus 1-2 options of 5-years/option. That totals some 10-15 years at one location.
Restaurants might sign 25-year leases.

Stephanie Miles

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May 19, 2015, 12:47:02 PM5/19/15
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I guess my concern is that I'd hate to look back 5 or 10 years down the line and think "Geez, I should have just bought a space." A lot of it will come down to the cost of what's available (both to buy and lease) when we're at that stage. In the small community we're in, there aren't tons of spaces that would even be suitable. Still in the earliest stages of planning right now...




On Sunday, May 17, 2015 at 4:16:22 PM UTC-7, Stephanie Miles wrote:

Alex Hillman

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May 22, 2015, 3:15:04 PM5/22/15
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"I guess my concern is that I'd hate to look back 5 or 10 years down the line and think 'Geez, I should have just bought a space.'"

I think of this kind of decision as "future-defensive". It's common - to do something now to prevent something later. Except...5-10 years down the road, are you REALLY going to be in a worse position to buy, vs better?

There's no such thing as a perfect space - now or later - so I would make sure that a purchase is a strategic choice vs a future-defensive one. 

Separately from the coworking space itself - ask yourself some questions.  Do you want be a building owner? Why? What happens if the coworking space fails - do you still want to own that building? What else would you want to do with it?

It's definitely smart to be thinking about this, and it's something that's personally a close-to-home issue for me, but it sounds like you're putting the cart before the horse. 

I've learned a LOT about commercial real estate along the way...but I don't regret renting for the last 8 years. It's really helped us stay focused and learn what we're best at. A fully loaded mortgage, insurance, etc would've been a bit more expensive financially, but renting gave us a LOT of flexibility and peace of mind that owning wouldn't have. 

I'd put your energy into in two places:

1 - work on building your community before you even start thinking about specific locations. Until you have a community who wants to make this happen with you, the rent v purchase conversation is premature. 

2 -  start talking to a lot of business owners, regardless of your goals of buying or renting. Find someone who you really like and trust, and understands what you're thing to do. Whether you rent from them or have their assistance when you begin to execute a purchase, it'll be VERY valuable to have them on your side long before you NEED anything from them. 

-Alex


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Tony Bacigalupo

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May 23, 2015, 9:14:58 AM5/23/15
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+1 for Alex's two main tips there. First thing's first. And a big +1 for Jerome's lease tips as well. 

I'll add something from my experience, because I'm dealing with it now and it's SO important to so many of us out there.

Plan for how this is all going to play out. 

It's easy in the beginning to shirk advice of developing an exit strategy, because it can feel at the time like an insult to the passion you feel for your new project. 

"But we're in love! We'll be together forever!"

No, you won't. Your business will outlive you, or you will outlive your business. In either of those cases, you both will benefit tremendously from preparing for a world in which you and your business are two different things with two different lifetimes. 

It doesn't mean you need to have exact answers ready before you even begin, but if you have the possible exits in mind early and revisit them at least annually or so, you'll be insuring yourself against future crises.

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If you intend to lease a space without a deeper relationship with the landlord, or a legally binding option to buy or extend the lease at an agreed-upon rate, you can bet on the rent going up not just a little or a lot but drastically.

You just can't know what's going to happen. Market conditions change. Even a friendly landlord might sell their building to someone else during the tenure of your lease, and that new landlord might see fit to improve the building and triple the rent. As Glen said, you don't know who might come to town with to drive up rents.

So you can bet on one of three scenarios:
  1. Find a landlord you can develop a deep relationship with, so they're invested (perhaps literally) in what you're building and you are secured against them jacking up the rent on you.
  2. Secure an option to extend the lease at an agreed-upon rate, or an option to buy, or both, in the lease.
  3. Plan for what you'll do when the rent skyrockets in not just your building but your whole city at the end of the lease term. You can try to find a suitable alternative location, diversify your business model, sell to someone else, or shut down. 
Distilled: Plan to become a landlord, or become really good friends with one, or for your current business model to not work anymore when the lease is up.

... but really, before you do any of that, you would benefit a lot from building the relationships that will form the cultural core of your new community first, and letting that guide how this process plays out in the early stages.

Vive le coworking!

Tony 
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