Sunday, July 29, 2018

Costs Involved in Opening & Operating a Franchise

cost to operate a franchiseBefore you invest in and sign a franchise agreement make sure you understand what your total costs will be. I see too many new franchises get in over their head when they do not analyze all the costs. You have to keep in mind that markets are different. Just because a certain franchisee is doing well in Phoenix does not mean you will do well with the same franchise in Austin. For example rental rates in the Phoenix market could be much lower than Austin retail space rents, which allows them to enjoy a lower cost of doing business and higher margins.

Initial Franchise Investment

You initial investment in a franchise includes not only the franchise fee, marketing costs, licensing, attorney fees, but also operating costs (e.g. salaries, training, uniforms, utilities, etc) for the first 12 months AND your commercial real estate costs. In most cases you will have to rent office, retail, or warehouse space. Below is a summary of commercial real estate costs to consider:

  • Security deposit and first months rent
  • Build-out costs for your retail store or office
  • Insurance for commercial space (property and general liability)
  • Signage
  • Building maintenance and repairs
  • Landscaping

Franchises can cost a little or a lot as it depends on the segment you choose and franchise brand. Costs can range from $10,000 to $5 million, however the majority of them range from $50k to $200k.

When starting any business you do not want to go into it undercapitalized. Whatever initial investment range the Franchisor gives you aim for the upper end of that range.

Get Personal Finances in Order

You also need to be realistic about your personal financial situation and ensure that you have enough money to cover your personal expenses while you invest in and grow your franchise. This means that you won’t be taking a salary from the new business for at least a year or until it’s profitable.

Franchise Commercial Real Estate Costs

Commercial real estate rental costs are often under budgeted for. Again just because a franchisee in Phoenix is getting a retail space base rate of $14 sf does not mean you will be able to get that in Austin, Tx where retail rents average $30 to $45 sf gross. Commercial real estate rental rates vary from market to market. You still want to find a good retail space near where people live, shop, work, and/or go to school however make sure you can afford the total costs before signing a lease.

Consider SBA Loan to Start Franchise

Many small business owners should consider taking loans to fund a new business venture. You take out a small business loan and lose money initially however as you scale your business and are profitable you will have an asset that will continue to produce income. Then later on you can sell it at a good valuation.

Many franchisees use Small Business Administration funding borrowing 30% to 70% with 10-15 year loan terms, however end up paying them off sooner. SBA loans are issued by a lender however partially guaranteed by the U.S. government. Government backed loans provide reasonable terms for borrowers and decrease the risk for lenders. The SBA loan process can be long and frustrating however many franchises have great relationships with lenders and this makes the process much easier for franchisees.

Best Austin Breweries & Brewery Tours in Austin Tx

austin tx breweries & toursSince the  Austin craft brewery boom started in 2010 more and more Austin breweries have been popping up near the city’s central business district as well as near and around the Austin Round Rock Metropolitan area. If you are looking for the best craft brews and brewery tours look no further. Below is a comprehensive list of the best breweries and brewery tours in and near Austin, Tx. Most of them are located in warehouse spaces in Austin Tx.

List of the Best Breweries in Austin Tx

1. (512) Brewing Company

407 Radam Lane
Austin, Tx 78745
(512) 921-1545
512brewing.com
Fan Favorite – Pecan Porter

2. Argus Cidery

12345 Pauls Vally Rd, #2
Austin, Tx 78737
arguscidery.com
Fan Favorite – Apple Bomb

3. Hi Sign Brewing

1201 Bastrop Hwy
Austin, Tx 78742
(512) 382-5264
hisignbrewing.com
Fan Favorite – The Astronaught Double IPA

4. Independence Brewing Co.

3913 Todd Ln #607
Austin, Tx 78744
(512) 707-0099
independencebrewing.com
Fan Favorite – Stash IPA

5. Jester King Brewery

13187 Fitzhugh Rd
Austin, Tx 78736
jesterkingbrewery.com
Fan Favorite – Le Petit Prince

6. Last Stand Brewing Company

12345 Pauls Valley Rd, Bldg i
Austin, Tx 78737
(512) 373-3629
laststandbrewing.com
Fan Favorite – Smash IPA

7. Orf Brewing

4700 Burleson Rd, F
Austin, Tx 78744
(512) 428-5217
orfbrewing.com
Fan Favorite – Oocheenama

8. Skull Mechanix Brewing

1005 E St Elmo Rd, Building 2
Austin, Tx 78745
(737) 300-1002
skullmechanix.com
Fan Favorite – The Gully Cat

9. South Austin Brewery

415 E St Elmo Rd
Austin, Tx 78745
(512) 354-2337
southaustinbrewery.com
Fan Favorite – Cross Roads

10. St Elmo Brewing Company

440 E St Elmo Rd, G-2
Austin, Tx 78745
(737) 300-1965
stelmobrewing.com
Fan Favorite – Carl Kolsch

11. Thirsty Planet Brewing Company

8201 S Congress Ave
Austin, Tx 78745
(512) 579-0679
thirstyplanet.beer
Fan Favorite – Thirsty Goat

List of Breweries Near Austin Tx

1. Acopon Brewing Co.

211 W. Mercer St
Dripping Springs TX 78620
(512) 829-4723
acoponbrewing.com
Fan Favorite – Gaspipes

2. Family Business Beer Company

19510 Hamilton Pool Rd
Dripping Springs, Tx 78620
(512) 829-4202
familybusinessbeerco.com
Fan Favorite – The Grackle

3. Suds Monkey Brewing Company

1032 Canyon Bend Dr, Suite B
Dripping Springs, Tx 78620
(512) 222-3893
sudsmonkeybrew.com
Fan Favorite – Funky Monkey IPA

4. Treaty Oak Distilling Ranch

16604 Fitzhugh Rd
Dripping Springs, Tx 78620
(512) 599-0335
treatyoakdistilling.com
Fan Favorite – Fitzhugh Ale

5. Twisted X Brewing Company

23455 Ranch to Market Rd 150
Dripping Springs, TX 78620
(512) 829-5323
twistedxbbrewing.com
Fan Favorite – Austin Lager

6. Two Wheel Brewing Company

535 S Loop 4
Buda, Tx 78610
(512) 361-3401
twowheelbrewing.com
Fan Favorite – Race Pointe IPA

7. Vista Brewing

13551 Ranch to Market Rd 150
Driftwood Tx 78619
(512) 766-1842
vistabrewingtx.com
Fan Favorite

Texas Brewery Regulations

  • Senate bills that were passed in 2013 allow brewpubs to have a taproom, sell beer, and/or distribute beer as long as they meet certain barrel production requirements. For more info on liquor and beer licenses in Texas

Thursday, July 19, 2018

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Friday, July 13, 2018

Bill M Moore thanks for following me on Twitter! https://t.co/OL8UvJjZzn


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What is a Letter of Credit When Renting Commercial Property?

letter of credit commercial propertyA letter of credit (LOC) is a document that guarantees rent payments up to a negotiated amount to a landlord in the event you (tenant) do not pay your commercial lease payments. It’s typically used in lieu of cash for the security deposit required when renting commercial real estate. Rather than write a check for the security deposit the bank issues a letter to the landlord guaranteeing them rent payments in the event you do not pay your rent. You may also here banks refer to them as a standby letter of credit or irrevocable letter of credit. These are pretty common when negotiating commercial property for lease in Austin Tx and I imagine they are in other markets as well.

Why Use a Letter of Credit Rather than a Security Deposit?

Some businesses would rather use their cash to grow their business rather than have it sit in the landlords bank account. For example maybe you need to buy a piece of equipment that can help you make extra money which justifies the cost of the letter of credit.

Also, if you are a startup with no track record or the landlord thinks you don’t have strong financials and pose a risk they may ask you for a security deposit that is more than one months gross rent. In some cases they may ask for 2-6 months of gross rent as a security deposit. Depending on the size of your space and rental rate this can amount to a lot of up front cash.

How Does a Letter of Credit Work?

To get qualified for one you will need to have a relationship with a bank. They may ask you to have a certain amount of cash in the bank or post some collateral (e.g. home mortgage) in order for the bank to qualify you. They will have you fill out some paper work that includes the landlords banks info, etc. Then once qualified they will send the landlord a letter giving them the ability to withdrawal payments in the event you do not pay rent.

Now the landlord will have to meet certain conditions. Banks won’t just let them take out money whenever they want. The only time a landlord can request money is if you don’t pay rent. If you never default on your lease then nothing ever happens. When negotiating the letter of credit you want to make sure that the landlord will be required to show the bank proof that you have not paid rent.

How Much Does a Letter of Credit Cost?

A letter of credit is not free. Banks will charge some sort of fee which is tied to the credit amount. Think of it as kind of a bank loan that never gets used, unless you default on rent payments. Ask your bank for details however in most cases the management of a letter of credit might cost a few hundred dollars per year. Then if you default on rent payments and the landlord withdrawals money you will be charged interest on that amount. Interest is NOT charged on any money unless it’s withdrawn by the landlord.

Disadvantages of Using a Letter of Credit

  • Cuts into your potential borrowing power. Collateral that you pledge for the LOC will not be available for another business loan.
  • They are not free. Check with you bank on costs however the yearly management will be at least a few hundred dollars a year PLUS interest if the landlord withdrawals money because you defaulted on rent payments.
  • If you are a startup and low on cash you may have to post collateral such as your home mortgage

Types of Letter of Credit

There are many types of letter of credit and the use of each depends on the bank, credit worthiness of person leasing or buying, and the landlord or sell. The most common will be irrevocable. Letters of credit can be used if buying commercial property or leasing commercial property.

Irrevocable Letter of Credit – Cannot be modified or cancelled without agreement of all parties

Revocable Letter of Credit – Can be modified or cancelled by the bank at any time and for any reason.

Stand-by Letter of Credit – Bank assurance that a person leasing commercial space is able to pay the landlord. The landlord does not expect to have to make any withdrawals.

Letter of Credit Sample

Below is an example of a letter of credit that was used on a 90,000 sf office lease in Austin, Tx

sample letter of credit

A letter of credit is a great tool to use if you can as it helps keep your cash freed up for business expenses. Make sure to carefully negotiate the conditions that a landlord must meet before they can make a draw. You want proof that the money is due and owed as well as advance written notice of landlord’s intent to draw.

 

Tuesday, July 10, 2018

Leasing Retail Space for Medical Office Use

Retail space for medical office useAs consumer demand shifts towards faster and more convenient medical services many healthcare providers are taking a closer look at leasing retail space for medical office use. This can be a great strategy for medical office users however as they evaluate retail locations it’s important that they consider a few things.

Retail Properties Infrastructure May Not Be Acceptable

Retail shopping centers were built for the traditional retail tenant. The cost to build a retail building is less than a medical office building as medical office buildings require more infrastructure. Medical office users such as urgent cares, surgery centers, clinics, etc., have vastly different needs than a retail store. For example the mechanical, electrical, plumbing, and HVAC requirements may not meet medical office standards.

Tenant Mix

A high traffic shopping center may look like a great location for a medical office however you need to evaluate the impact that the tenant mix could have to parking and getting into and out of the retail center. Do you want to be next to a major grocery store or next to a big box retail tenant that generates a ton of street and parking lot traffic? There are some benefits however those may not be not as desirable as a smaller retail strip center that has more convenient parking. As consumers focus more on convenience and less on the provider it’s important that you look at easy ingress and egress.

Ideally you want to be located in a retail center with somewhat comparable tenants. Being next to a Planet K may give your medical office a negative image. Looks for locations that have tenants that you think your clients respect and use.

Parking

Convenient parking is one of the main reasons you would consider leasing retail space for medical office use as this will enhance the patients overall experience. Easy in and easy out. Look for highly visible, smaller shopping centers in densely populated neighborhoods with above standard demographics. If you lease space in a large shopping center or big box power center your patients may have to compete for parking spaces and since those are mainly found on major thoroughfares getting to and from may take longer.

Tenant Improvements Costs are Higher

Medical office property owners are more familiar with the build-out requirements of medical users and typically offer larger tenant improvement allowances. Shopping center owners are not familiar with medical office buildouts and don’t typically provide as much allowance. Medical officer users have a great demand for landlord funded tenant improvement allowances which can make things challenging.

Medical office buildouts typically range from $70 to $150 sf and this does not include FF&E. When negotiating a lease for medical use in a retail shopping center you may have to sign at least a 7-10 year lease to get an allowance equal to what you would from a medical office building owner. 

Lease Contract

Retail lease contracts are different from medical office leases and fail to address the key components of medical tenancy.  Most retail leases will be boiler plate and focus on retail tenants. Below are a few things to consider when evaluating a retail lease contract for medical office use. 

Permitted Use – there maybe a clause in the lease that does not allow medical use which would need to be stricken entirely. Medical tenants would also want to ensure that they can get an exclusive and that no other tenant has an exclusive that would prevent medical use. For example Walgreens or CVS may have an exclusive right to medical services.

Power & Compliance – Some medical tenants may have higher electrical needs (e.g. X- ray machines, CT scans, MRI, and other diagnostic equipment) or back up generator needs so it’s important to ensure you have language that defines and allows this. Also, medical tenants have HIPPA and other standards to adhere to so make sure the retail shopping center contract addresses this in detail.

Relocation clause – Its common for retail leases to have a relocation clause that allows the landlord to relocate them if needed. Because of the cost of a medical office buildout any relocation clause should be stricken from the lease.

Liens – Many healthcare practices finance improvement costs as well as medical equipment and other FF&E. Therefore make sure that the landlords lien rights are subordinate to the tenants.

Restoration – Some leases may have a clause that requires a retail tenant to restore the space to original condition before they move out. As a medical office user you want to strike this request.

Privacy – Retail landlords typically negotiate the right to enter the space to show prospective tenants or ensure compliance with the lease and/or make repairs. Healthcare providers need to limit this access to exam rooms and patient record rooms.

At the end of the day you need have a real estate attorney that specializes in medical office spaces review the lease. Healthcare providers have unique needs and before leasing retail space it’s important that you ensure the retail location can accommodate your current and future medical space needs.

 

30 Home Remodeling Ideas | Advice When Doing House Renovations

home remodel ideas & renovation adviceIf you have ever renovated a home you know that things almost never go as planned. Before you start your next house remodel consider the advice below from many homeowners that have been through the process. If you want to increase your chances of a successful remodel follow these guidelines!

  1. Have an excellent eye for design and the time to manage the process every day. If you don’t hire someone who does.
  2. Home remodels are rarely completed when contractors say they will be completed.
  3. Make a written list room by room of the changes you want to make. Make sure to consider electronics, electrical & plumbing, etc. Do you need another office space, larger kitchen or bathroom? Wave he magic wand now. You can always value engineer after if prelim bids are too high.
  4. Make a Pinterest or Houzz account for you and the family to collaborate on needs and wants.
  5. If you hire an architect make sure you will get to see 3D renderings as they will help you visualize things better.
  6. Talk to lots of friends about their experiences.
  7. Keep a binder that will house all your notes, invoices, paint colors, product choices, and all communications with your vendors.
  8. Create a budget however expect overruns of 20% to 50%
  9. If the home was built before 1978 have it inspected for asbestos and lead.
  10. Budget is a fluid concept as there will always be more that you want to do.
  11. You will spend 3 times what you planned to.
  12. Have at least a 50% contingency because everything costs more and you will add stuff along the way.
  13. Redo entire rooms. Don’t just piece meal things as you will never have a full realization of the design.
  14. You can always do more later.
  15. Do the hardest things first (e.g. plumbing, wiring, windows, etc.
  16. Do kitchens before bathrooms.
  17. Move all walls during the beginning phases.
  18. Foam insulation in the best
  19. Don’t pay the contractor or subcontractors the full bill until everything is completed. Consider splitting payments into 3 chunks (Before, midway, and completion)
  20. Give the contractor complete details specifications of your scope of work. 
  21. You will have change orders
  22. Take photos beginning, middle and end. Use video also. Take shots from different angles. Take photos of the wall frames before sheetrock goes up so you know what is behind them if you ever need to install cabling or hang things
  23. Hire a qualified contractor with great recommendations. Find one that you can trust.
  24. Ask for and check all contractor past clients
  25. Get everything in writing with contractors that you hire.
  26. Expect to pay more than you budgeted for and expect it to take longer than planned.
  27. Make sure to check on the project yourself and communicate regularly with the contractor.
  28. Plan on a weekly onsite meeting with the contractor to review progress

Friday, July 6, 2018

Different Perspectives in Commercial Real Estate Property Market Analysis

congress bridge downtown AustinCommercial real estate market analysis is important to anyone involved in property markets: developers, users, investors, brokers, financial analysts, and government officials. Each has their own perspective and it’s important that you understand who the players are and what’s important to them. If you want to get deals done you have to listen to everyone’s needs and accommodate them the best you can, especially when buying or leasing commercial real estate in Austin, Texas!

Developers must understand factors such as rent levels, construction costs, absorption, underserved markets, and the cost of capital to be able to make good decisions about where, when, how, and whether to develop. Users who plan to rent commercial real estate space need to know current quoted market rents as well as future rent increases, size space needed, and for how long they want to rent. Purchasers, both investors and users want to make sure they don’t spend more money than needed. Commercial real estate agents need instant access to market information if they want to be credible at representing tenants or landlords. Financial analysts need to be able use market data to determine risk vs return for their investors. Government officials depend on commercial market analysis to plan and forecast for future human resources and infrastructure. 

It’s important to analyze the market from different perspectives. Below are examples of each.

Developer Perspective

A developer needs to know that there will be demand for a building when it’s ready to occupy. Because development periods can last as long as 2 years or longer they need to know the demand for commercial real estate when they start construction and forecast demand at the time they complete construction. They must determine whether there is a shortage of supply of a certain kind of commercial real estate and whether there will be enough absorption at a rental rate needed to make a profit.

User Perspective

Users of commercial real estate whether leasing or buying want to make sure they are getting space at the lowest possible cost. They must make decisions about whether to purchase, rent, or build, which means they must know market conditions such as land costs, construction costs, purchase prices, and rental rates. Users also need to determine whether lease terms in a particular market are flexible to meet changing space needs, the share of expenses that commercial tenants typically pay in a certain market, and how much rent they will have to pay if they want access to certain markets.

Commercial Real Estate Agent Perspective

Brokers need to stay updated on the market to be credible with their clients and prospects. A tenant representative who pay a higher rental rate than they have to will not survive long; nor will a landlord representative who leases space to tenants at below market rates.

The best commercial agents keep a pulse on the market 24/7 and know what is available now and in the future.

Investor Perspective

Market analysis is important to investors because they need to info to calculate the feasibility model. For new construction, information on rents and expenses comes from market analysis. For existing properties, assumptions about rents vacancies, lease expiration dates, etc come from market analysis. Investors also need market data to calculate their return on investments (ROI’s), the weighted average cost of capital, and capitalization rates (aka CAP rates). All the ingredients in discounted cash flow models come from market analysis.

Financial Analyst Perspective

Financial analysts must understand the risk characteristics of a certain market to evaluate debt and equity investments. Markets supported by weak companies or by undiversified economies face more risk then markets that are more diverse with strong companies. Consequently the required rate of return must be higher in riskier markets than in less risky markets

Government Perspective

Government officials need to forecast and estimate future macroeconomic conditions in order to forecast and plan for future infrastructure and staffing. 

On a microeconomic basis, government officials often want something in exchange for granting development entitlements. If they have knowledge of market conditions they can make demands of developers. For example, if they know a developer has a great location and wants to build something they may decide to require off site improvements from the developer. Developers must also use market analysis to educate government officials about market conditions. If a government official is concerned about a lack of affordable housing and a developer can demonstrate a large gap between demand for and supply of housing, the official might be persuaded to approve a large new residential subdivision.

Conclusion

As you can see each player in real estate has a different perspective and it’s important that you understand not only your needs but their needs. If you want to make deals happen in your market you have to know all the players and the impact that your project will have on them.

Thursday, July 5, 2018

How to Value Commercial Real Estate Property

commercial property valuationI am often asked how much a commercial real estate property is worth from clients interested in buying commercial property. My answer is it depends on your investment objectives, property type, and local market conditions.

There are 3 basic approaches to estimating the market value of a commercial property: sales comparison, cost approach, and income approach. Each of these commercial real estate valuation methods has numerous variations so it’s important to apply the right approach based on the property type and market characteristics.

Sales Comparison Approach to Market Value

The sales comparison approach relates the value of a property to similar properties that are currently listed for sale or that have been sold historically. Realistically no two properties are identical so adjustments need to be made for the differences in the age, size, location, condition, building/land ratio, zoning, tax policies, date of sale, and other characteristics and conditions that would influence a property’s market valuation.

Adjusting the comparables for each variance will allow you to select the values, giving greater weight to the comparables more similar to the subject property. The more similar, the more reliable they are considered. At the end of the day the sales comparison approach is the price a purchaser is willing to pay and the seller is willing to sell for in an open competitive market.

The sales comparison approach works best when there are plenty of recent sales of comparable properties. The more properties that have recently sold makes it easier to find and select the most comparable.

Income Approach to Market Value

The income approach is is applied on income producing properties and is based on the premise that a relationship exists between the income a property produces (future benefits) and its value. The net operating income that an investor can predict will be generated for the length of ownership would be considered the future benefits. Two methods used to determine value based on income are the direct capitalization method and the discounted cash flow model.

Direct Capitalization Method

This method converts a one year stabilized net operating income (NOI) into a market value for the property. The formula is V = I/R. For example if you know the NOI is $50,000 and the asking sales price or sold price is $500,000 then you know the Cap rate is 10%. Then you compare the cap rates of all the comparable properties.

Discounted Cash Flow Model

This is a variation of the Cash Flow Model and used when uneven cash flows are anticipated. This model determines property value by discounting each years NOI and final sales proceeds to a present value (PV)

The most likely to purchase income producing properties are investors which is why the income approach is the best choice to value non owner occupied properties.

Cost Approach to Market Value

The cost approach considers the current cost of rebuilding a property minus accrued depreciation (physical deterioration, functional obsolescence, and external obsolescence). This approach is based on the premise that a property’s value is influenced by the cost to produce a comparable property. The logic is that a rational and informed buyer would pay no more for an existing property than the cost to build a substitute property with the same utility.

The cost approach is used most often when sales comparison data is lacking, the property has not been built yet, or the it’s a special use property with few or no comparable sales.