If you own your own company, whether you are expanding your operations or simply staying where you are, one question has likely come up. Is it better to own our own space or lease it? With prices being the way they are, it might very well be the best time to buy your own real estate. However, owning MIGHT not be the best solution depending on what some of those intrinsic answer turn out to be. Why don’t we look at a few well-known brands to see what their lease v own model is…Starbucks and Chevron.
Starbucks…the little coffee shop from Seattle that started in 1971 and is now the largest coffee house in the world with over 17,000 stores in over 50 counties. Starbucks is a company that expanded SO FAST that in the 1990’s until about mid 2000 they opened a new coffee house every single workday. If you’re ever in downtown San Francisco or NY, it’s not that hard to find two Starbucks locations on opposite street corners
Now let’s look at the Starbucks mode. Nearly all of their locations are in retail shopping centers or high density office markets in downtown locations. If Starbucks bought their location, they’d have to buy the entire retail center or the entire office complex and manage them for investment…something that’s not in their business model. Instead, they lease all their locations.
Also, we have to know what Starbucks expects their Net Present Value to be as explained in my “Determining Net Present Value” video. At one point I recall reading that for every $1 Starbucks received from an investor through stock, they could turn and make over .25-50 cents with that same $1 in a single year. A company that’s rapidly growing like Starbucks would always set their NPV over 25 to 50%. The reason they could set it at such a high number was because they knew they could create SUCH a profit from a single dollar! Most income property can make anywhere from 5-20% depending on location and risk…so realistically, what kind of property doubles in value every year? If Starbucks is making 25-50 cents in profit for every dollar received, they would have to find a property worth buying that could make just as much. Considering how highly implausible that is, why would they waste their time when they could just lease out a space and keep expanding and making money?
Now let’s take a look at Chevron – a large company that is still growing, but at a much slower pace than Starbucks due to their smaller profit margin…Without knowing the exact numbers, let’s presume for every $1 they receive from an investor they create 5-10 cents profit. A company like Chevron may not be able to demand such a large NPV like Starbucks, but they can definitely demand a 5-10% NPV rate because that is the profit they expect to make.
Chevron of course wants to grow and expand, but nowhere NEAR the pace as Starbucks…they simply can’t!! They’re already grown! So with their NPV at 5-10%, even if the property they purchase doesn’t appreciate in value very much or make them a good return, it may still be worth it for the STABILITY. Can you imagine if Chevron rented some of their huge refineries and all of a sudden the landlord raised rents on them because the market has gone up?? What do you think would happen to their bottom line? Would they be able to REALLY relocate their huge refinery? What do you think would happen to the consumer at the gas pump? What leverage would they have as a company vs. Starbucks who could simply pack up and move across the street if they don’t like the lease rates?
Remember, the rule that buying is better than leasing doesn’t always apply in business. First and foremost, you have to decide whether or not you want the stability and commitment of a large purchase, or the flexibility of leaving once your lease is done. There’s also financial issues in regards to if you have the capabilities for such a large transaction. These are just some of the questions that have to be addressed when considering leasing or owning. Usually, if your business is rapidly expanding, leasing is the common case. Whereas if you’re looking for stability and modest growth, a purchase may be a better option. If you’re wondering if expanding is right for you or what kind of data you can get for when the time comes, be sure to watch my “Site Selection” video. Determine the negatives and positives of both scenarios and determine at which point you would feel comfortable with either buying or leasing. This way you can use your capital wisely to help your business flourish the way you see fit…now that’s good to know. 🙂
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