Should Music Retailers Buy Or Rent Their Building?

Should Music Retailers Buy Or Rent Their Building?

Joe Lacerda head shot 1
Joe Lacerda, owner of Manchester Music Mill needed financial help to fund his expansion needs. When his own bank in 2013 came up short, Joe reached out to Stephen Heavener, Executive Director of Capital Regional Development Council to obtain an SBA 504 loan.  The US Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates. I previously explored this alternative financing venue in a recent post I wrote. As a result of receiving his funding, Joe doubled his previous year’s revenues, exceeding all projections and has been growing ever since.

Joe has a reputation of being a savvy business man, and has very definite ideas about real-estate.

Here’s how our conversation went:

Jaimie: How important was owning your building?

Joe: The building purchase is a huge part of stability to a retail store. With retail, you need quite a bit of space with the old school touch and feel format. With the gross profit being squeezed as time goes on, it makes paying rent tougher and tougher.

I highly recommend a purchase of your own space/building if possible so you have better control on what the future holds.

Jaimie: Thanks Joe. What prompted you to go from a renter to an owner?

Joe: Before I bought the 22,000 square feet building I am in now, I was paying almost $8,000 a month for 6,000 square feet for decent retail space. And it was climbing at 4% per year which is typical in my area. Now I occupy about 12,000 square feet and I have a tenant for the remaining space. My out of pocket “rent is $5500 (with more than double the space).

Jaimie: That was certainly a sound financial decision for you. How about the taxes?

Joe:  The building depreciates over 31 years so my assets increase as my principal on the loan goes down but I’m not paying extra taxes on the increase in worth.

Jaimie: Does the business own the building?

Joe: The building is separate from the business and if I decided to sell off the business or as part of the business, I can set the rent and terms of the sale to incorporate a lease without giving up control of my biggest and most reliable asset, the building and the land that it is on.

Joe is right about the benefits of owning your building. Rather than paying rent, over time additional value is created, often independent of the business itself. After your transition from the business, there are significant tax advantages having the original owner “lease back” to the new owner.

Like any financial decisions, there are pros and cons when committing to a mortgage.

Remember how the interest works on a mortgage. A $100,00 mortgage for 30 years at 4% will actually cost you $171,869, assuming you are paying equal monthly payments on time. In simple terms, with no inflation, your building should be worth at least $171,869 when you are ready to sell to break even. This would represent ongoing “present value” In other words each month for thirty years you received $477 worth of building value. Contrast this with investing $477 each month for 30 years at an annualized rate of return of 7%. The account balance would be $540,701.  So if your building isn’t worth $540,701 in 30 years, you’ve lost money. In addition, no consideration has been given to the additional expenses from owning a building or the impact on purchase power erosion due to inflation.

Joe:  The option of investing vs. buying is irrelevant because if you are in the retail business, you have decided to spend that money on space. I may be better off investing that allocated money and getting a 7% return but a building that I can count on can help me operate and plan with more certainty.

Of course, as in Joe’s case, a business mortgage can potentially offer additional benefits than a home mortgage, least of which is is using building ownership to help you grow your MI business.

It’s smart to check with your financial planning, tax and legal professionals for the pros and cons as it relates to your specific situation.

Please note: BH Wealth Management does not offer legal or tax advice. Please consult with your legal and tax professionals.

Written by Jaimie Blackman

Jaimie Blackman

Jaimie Blackman president of BH Wealth Management and Financial Life Planner, created Sound Financial Decisions™ powered by MoneyCapsules®, to help guide business owners through the complexities of succession planning.

Jaimie is a featured writer for Music Inc. and Canadian Music Trades magazine. He has spoken at NAMM U Idea Center, and at Yamaha’s Succession Advantage.

As a financial literacy educator he has taught at New York University and has lectured at the 92nd Street Y,
Marymount Manhattan College, and CUNY.

He is a licensed Financial Advisor, and Certified Wealth Strategist® who helps his clients implement investment and insurance solutions which are aligned to their personal values.

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