Purchase commercial real estate w/intent to start business

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Purchase commercial real estate w/intent to start business

Luca Mastrangelo
Investor · Cape cod MA · Member since 2015 · 62 posts · 9 votes

I want to buy commercial real estate as an investment with the intent of using some of the space to do something in the food space.  I'm on cape cod MA, upper cape specifically, where hundreds of thousands of tourista flock each summer but also live in a town that has enough year round residence and business that a food place can stand on it's own.  My first step would be coffee and expand from there. I currently work a regular well paying 9_5 job but would quit down the Rd once the business is launched and work for free/significantly less than I make now.  

On cape cod the zoning  for a cafe/food establishment is very challenging. Places that can support a restaurant/food are very difficult to come by because of septic and zoning requirements.

I've looked at about a half dozen places over the last year. None of them had the right mix of variables to get a coffee shop going.

A small +1800 sq ft bldg just had a for sale sign put up on it. It currently has 2 business with 1 year leases. Leases are 1100 and 1200/month. Taxes are $3800/year. Insurance is $800/year. One side is an antique store the other is a ductless ac showroom/installer. Bldg was sold to current owner in 2016 for $239k. Owner added $80-120k in improvement. Gutted and all new. New electrical, new windows , siding , roof , paved 14 spot parking lot. , New handicap accessible bathroom on both sides etc....

Owner is going to list at $429. I don't think he'll go less than $399 and maybe not even that.

Here's my plan. Need help. Poke holes and please point me in the right direction.

Buy bldg for $399k ish. I would have to get a commercial loan.  Since I wouldn't have a business in there right away I would not qualify for a small business loan up front. I would haveto take a commercial investment loan. 25% down and has to cash flow 1.25x ebitda. Using 5.25% and 20 year amoritization schedule the month payment would be $2021. I would plan on keeping tenants for the remainder of their leases and in August when the antique store lease is up move into that space. I'd like to keep the heat pump place for another year or two while I build out the business.

Doing just coffee I'd have to so about 150-175 people a day @$3.5/person. This assumes a $1200 rent for the space 2 employees at $15/hr and 25% cogs of revenue on coffee. Doesn't include any other revenue sources. Just trying to get into the ballpark of things. Location is A+ (right off highway with easy on/off) and the Cape in general and this area in particular is a food dessert. There's a a Dunkin or 2 and another bakery in a down town setting within 5 miles. Not to say there isn't any competition around but no legit good coffee and none as conveniently located.

In broad strokes plan would be to:

1. Buy now

2. Collect Rents trhu Aug next year

3. Continue working my reg 9-5 now while I finalize concept and shop for some used equipment

4. Work with town to get zoning in place. Won't be an issue. Has septic with grease trap and in the right zoning. Needs a waiver.

5. Launch coffee next Sept

6. Grow business and quit current job. Essentially buying a new job. I already have a 401k nest egg I can let mature for 10 years and retire from so money isn't primary motivation

7. Expand into other side of bldg when time is right.

My next steps are to figure out what cap rates are and what retail spaces rent for on a sq ft basis in the area. with that info I should be able to more accurately determine what's a good sale price for the building.

when I was looking into cafes/ coffee shops before, I read a lot of the facts about how many fail and why they don't work etc... I've lived in the cape for three years now, which is not a long time, but since I've been here I have noticed that there is absolutely no unique food options. I shouldn't say none but very few. The cape is about 10 years behind  Boston and Boston is about 10 years behind New York in terms of food and drink.  I don't think there's any ramen shops out here. No unique donut places either. One or two third-wave Coffee locations on all the cape. That type of stuff just doesn't exist here. I think there's a lot of pent-up demand for that type of offering. people are seeing that more and more and would make the stop if that's their cup of tea so to speak.

Tandem coffee in Portland Maine is the type of coffee destination that I seek out when traveling.

Good info/facts on cap rates that at least help frame the problem.

https://www.calkain.com/research_reports/net-lease...

After some feedback from the small business forum on Reddit and some more investigation  this is where I'm at: 

Biggest risks are over paying for bldg and zoning from town. I've talked to town and it requires a waiver but shoulsnt be an issue since it's not in a historic district and has the right septic system

Any experts with knowledge of Retail space renta on upper cape? Cap rates?

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Charlie MacPherson
China, ME · Member since 2014 · 3k+ posts · 4k+ votes
8y

@Luca Mastrangelo  Lots to pick apart - sorry.

1. The Cape is a great place for a small business from Memorial Day to Labor Day.  Then they roll up the sidewalks.  Tourists are gone, summer workers are gone and a good number of residents are gone - or will be before the first snow.  That means two things:  a). You had better make a TON of money in the summer, because it's going to have to carry you through the fall, winter and spring.  And b) launching in September, when a large part of the population is evacuating isn't the best idea.

2. Coffee?  In Dunkin's back yard?  You can't swing a dead cat around here without hitting a Dunkins.  Not to mention that Starbucks is still growing and giving Dunkins a run for their money.  Don't forget Honey Dew and a couple of hundred independent coffee shops.  

https://www.menupix.com/capecod/c/19/Coffee-Shops-...

Heaven help you if Tim Horton's puts on another push to the south. They have their systems really dialed in.  (There are still a bunch in Maine.  The MA location closed.)

What are you going to do to stand out in that crowd?  Hint: coffee is a commodity.  The experience doesn't have to be.  Just don't try to be the low-price provider. That's a fast track to going out of business.

I know you think that there's a shortage of competition, but what happens if Dunkins plunks a new location down across the street from you?  Looking at it another way, if your location would support a coffee shop, don't you think Dunkins, Starbucks, Mary Lou's or Honey Dew would already be there?

The barriers to entry are very low.  Find a facility, do the buildout, get the requisite licenses, buy the equipment, brew the coffee and open the doors.  When barriers to entry are that low, new competition is always around the corner.

PS - McDonald's coffee is very good.  And it's $1.00 for any size.

2. You're talking about running a cash business as an absentee owner.  I can tell you from extremely painful personal experience that your employees, left unsupervised by you, will siphon off a ton of cash.  In my retail business (thankfully sold in 2015 at only a $58,000 loss), people I liked and trusted stole many tens of thousands of dollars over the 11 years I owned it.  They disguised it very well - your employees will too.  The deviousness and ingenuity of employee/thieves is an incredible thing to witness.  Mine were PhD-level experts at stealing money and hiding it.

3. So, you want to be a commercial landlord?  Be prepared for a tenant's failing business to stiff you.  HARD.  It will take you a long time to replace an evicted tenant too.  You'll have plenty of rental candidates, but you need to be sure that their business is viable, properly funded and Amazon-proof.  Even better if their business complements yours, but it's unlikely you'll get to be that choosy.

Make sure that you do NNN leases and get personal guarantees from tenants.

4. Capex. If your septic fails, you can be in for a VERY large expense - well into 5 figures. There are others too - like a central air system that can cost you $15,000 or more when it goes down. Be sure you have a good amount set aside for capex.

5. Buying a job.  Glad you recognize that's what you're doing!  Say goodbye to the freedom of taking off for an impromptu weekend away.  A real summer vacation.  Sick days.  Bereavement leave.  Going home after your 9-5 and shutting off your "work brain" when you get through your kitchen door.  Leaving the company in somebody else's hands when you end your shift.

Say hello to managing minimum wage employees (may God have mercy on your soul!)  Checking the register tapes like you're dissecting the Zapruder film.  Customer complaints - about *everything*.  Employees saying something on social media that damages your reputation.  Early mornings and late nights.  Payroll.  False accusations of discrimination.  Supplier screw-ups.  Crazy people leaving bad Yelp reviews.  Paying your own health insurance.  Bookkeeping.  Dealing with abusive customers.  Managing your own advertising.  Long sessions of paying bills.  More than likely, you're buying yourself a job that pays badly, demands everything and never let's you relax.

I think overpaying for the real estate is the least of your problems.

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  • Charlie MacPherson
    China, ME · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Luca Mastrangelo  Lots to pick apart - sorry.

    1. The Cape is a great place for a small business from Memorial Day to Labor Day.  Then they roll up the sidewalks.  Tourists are gone, summer workers are gone and a good number of residents are gone - or will be before the first snow.  That means two things:  a). You had better make a TON of money in the summer, because it's going to have to carry you through the fall, winter and spring.  And b) launching in September, when a large part of the population is evacuating isn't the best idea.

    2. Coffee?  In Dunkin's back yard?  You can't swing a dead cat around here without hitting a Dunkins.  Not to mention that Starbucks is still growing and giving Dunkins a run for their money.  Don't forget Honey Dew and a couple of hundred independent coffee shops.  

    https://www.menupix.com/capecod/c/19/Coffee-Shops-...

    Heaven help you if Tim Horton's puts on another push to the south. They have their systems really dialed in.  (There are still a bunch in Maine.  The MA location closed.)

    What are you going to do to stand out in that crowd?  Hint: coffee is a commodity.  The experience doesn't have to be.  Just don't try to be the low-price provider. That's a fast track to going out of business.

    I know you think that there's a shortage of competition, but what happens if Dunkins plunks a new location down across the street from you?  Looking at it another way, if your location would support a coffee shop, don't you think Dunkins, Starbucks, Mary Lou's or Honey Dew would already be there?

    The barriers to entry are very low.  Find a facility, do the buildout, get the requisite licenses, buy the equipment, brew the coffee and open the doors.  When barriers to entry are that low, new competition is always around the corner.

    PS - McDonald's coffee is very good.  And it's $1.00 for any size.

    2. You're talking about running a cash business as an absentee owner.  I can tell you from extremely painful personal experience that your employees, left unsupervised by you, will siphon off a ton of cash.  In my retail business (thankfully sold in 2015 at only a $58,000 loss), people I liked and trusted stole many tens of thousands of dollars over the 11 years I owned it.  They disguised it very well - your employees will too.  The deviousness and ingenuity of employee/thieves is an incredible thing to witness.  Mine were PhD-level experts at stealing money and hiding it.

    3. So, you want to be a commercial landlord?  Be prepared for a tenant's failing business to stiff you.  HARD.  It will take you a long time to replace an evicted tenant too.  You'll have plenty of rental candidates, but you need to be sure that their business is viable, properly funded and Amazon-proof.  Even better if their business complements yours, but it's unlikely you'll get to be that choosy.

    Make sure that you do NNN leases and get personal guarantees from tenants.

    4. Capex. If your septic fails, you can be in for a VERY large expense - well into 5 figures. There are others too - like a central air system that can cost you $15,000 or more when it goes down. Be sure you have a good amount set aside for capex.

    5. Buying a job.  Glad you recognize that's what you're doing!  Say goodbye to the freedom of taking off for an impromptu weekend away.  A real summer vacation.  Sick days.  Bereavement leave.  Going home after your 9-5 and shutting off your "work brain" when you get through your kitchen door.  Leaving the company in somebody else's hands when you end your shift.

    Say hello to managing minimum wage employees (may God have mercy on your soul!)  Checking the register tapes like you're dissecting the Zapruder film.  Customer complaints - about *everything*.  Employees saying something on social media that damages your reputation.  Early mornings and late nights.  Payroll.  False accusations of discrimination.  Supplier screw-ups.  Crazy people leaving bad Yelp reviews.  Paying your own health insurance.  Bookkeeping.  Dealing with abusive customers.  Managing your own advertising.  Long sessions of paying bills.  More than likely, you're buying yourself a job that pays badly, demands everything and never let's you relax.

    I think overpaying for the real estate is the least of your problems.

    2Reply
  • Luca Mastrangelo
    OP
    Investor · Cape cod MA · Member since 2015 · 62 posts · 9 votes
    8y
    Originally posted by @Charlie MacPherson:

    @Luca Mastrangelo  Lots to pick apart - sorry.

    1. The Cape is a great place for a small business from Memorial Day to Labor Day.  Then they roll up the sidewalks.  Tourists are gone, summer workers are gone and a good number of residents are gone - or will be before the first snow.  That means two things:  a). You had better make a TON of money in the summer, because it's going to have to carry you through the fall, winter and spring.  And b) launching in September, when a large part of the population is evacuating isn't the best idea.

    2. Coffee?  In Dunkin's back yard?  You can't swing a dead cat around here without hitting a Dunkins.  Not to mention that Starbucks is still growing and giving Dunkins a run for their money.  Don't forget Honey Dew and a couple of hundred independent coffee shops.  

    https://www.menupix.com/capecod/c/19/Coffee-Shops-...

    Heaven help you if Tim Horton's puts on another push to the south. They have their systems really dialed in.  (There are still a bunch in Maine.  The MA location closed.)

    What are you going to do to stand out in that crowd?  Hint: coffee is a commodity.  The experience doesn't have to be.  Just don't try to be the low-price provider. That's a fast track to going out of business.

    I know you think that there's a shortage of competition, but what happens if Dunkins plunks a new location down across the street from you?  Looking at it another way, if your location would support a coffee shop, don't you think Dunkins, Starbucks, Mary Lou's or Honey Dew would already be there?

    The barriers to entry are very low.  Find a facility, do the buildout, get the requisite licenses, buy the equipment, brew the coffee and open the doors.  When barriers to entry are that low, new competition is always around the corner.

    PS - McDonald's coffee is very good.  And it's $1.00 for any size.

    2. You're talking about running a cash business as an absentee owner.  I can tell you from extremely painful personal experience that your employees, left unsupervised by you, will siphon off a ton of cash.  In my retail business (thankfully sold in 2015 at only a $58,000 loss), people I liked and trusted stole many tens of thousands of dollars over the 11 years I owned it.  They disguised it very well - your employees will too.  The deviousness and ingenuity of employee/thieves is an incredible thing to witness.  Mine were PhD-level experts at stealing money and hiding it.

    3. So, you want to be a commercial landlord?  Be prepared for a tenant's failing business to stiff you.  HARD.  It will take you a long time to replace an evicted tenant too.  You'll have plenty of rental candidates, but you need to be sure that their business is viable, properly funded and Amazon-proof.  Even better if their business complements yours, but it's unlikely you'll get to be that choosy.

    Make sure that you do NNN leases and get personal guarantees from tenants.

    4. Capex. If your septic fails, you can be in for a VERY large expense - well into 5 figures. There are others too - like a central air system that can cost you $15,000 or more when it goes down. Be sure you have a good amount set aside for capex.

    5. Buying a job.  Glad you recognize that's what you're doing!  Say goodbye to the freedom of taking off for an impromptu weekend away.  A real summer vacation.  Sick days.  Bereavement leave.  Going home after your 9-5 and shutting off your "work brain" when you get through your kitchen door.  Leaving the company in somebody else's hands when you end your shift.

    Say hello to managing minimum wage employees (may God have mercy on your soul!)  Checking the register tapes like you're dissecting the Zapruder film.  Customer complaints - about *everything*.  Employees saying something on social media that damages your reputation.  Early mornings and late nights.  Payroll.  False accusations of discrimination.  Supplier screw-ups.  Crazy people leaving bad Yelp reviews.  Paying your own health insurance.  Bookkeeping.  Dealing with abusive customers.  Managing your own advertising.  Long sessions of paying bills.  More than likely, you're buying yourself a job that pays badly, demands everything and never let's you relax.

    I think overpaying for the real estate is the least of your problems.

     Charlie , thanks for the feedback. A couple things. 

    1. I thought I mentioned it in my post but I would not be an absentee owner. I was planning on quitting my job shortly after opening the business and working full-time.  

    2. I can appreciate the concern about coffee and competition. However I wouldn't be targeting Duncan audience. Look up tandem Bakery in Portland Maine. That's the kind of place that I go for coffee if available. Those are the clients I'm looking for. They want to be bothered if Duncan was across the street from my place.

    3. Do you have any information regarding cap rates or retail price per square foot in the area specifically upper cape?

    4. I'm in the Bourne area , and there's quite a few people who live in the area and work full time around this neck of the woods. There's also quite a few people that drive off you cape every day.  I should be able to capture quite a few of those folks as well. Again I don't think there's any competition for "good" coffee and that's what I would be selling. You can also research third-wave coffee that's another descriptor for what I would be doing.

    5. Cumby's coffee is only a dollar too and better than McDonald's.

    0Reply
  • Charlie MacPherson
    China, ME · Member since 2014 · 3k+ posts · 4k+ votes
    8y

    @Luca Mastrangelo Gotcha - I thought you planned on gradually phasing in to the new gig.  Still the concerns about a cash business are valid.  You'll have to keep an eagle eye on the receipts, especially before you're full time.

    Bourne is certainly better than further down Cape - like Chatham or Wellfleet!

    If you're in Bourne and targeting traffic that's driving off-Cape, be sure to get a location on the northbound/off-Cape side of the road to catch the morning commuting traffic.  I think commuters are unlikely to cross oncoming traffic twice on their way to work for a cup of coffee.  You'll also need a high-throughput drive through window.

    I'm skeptical about the gourmet coffee market.  But then again, I really like Dunkin's, McDonalds and Cumby's.  Plus I'm a cheapskate.  I won't pay Starbuck's prices for bitter, acidic coffee.  I'd much rather that large hot with 3 creams from McDonalds.

    My bet (and I reserve the right to be wrong) is that the most important ingredient in a gourmet shop is marketing.  You'll have to create the image of a far superior experience and then convince the consumer that there's a real benefit that's worth $3.50/cup, when the competition is cheaper and probably tastes very similar.

    I looked at Tandem's website.  It didn't really impress me.  What I got is that they're a company that roasts coffee and sells it wholesale - and by the way, also has 2 retail locations.  It looks like a modern-ish interior design, but that's not going to help with the morning commuter who just wants to zoom through your drive-through and get back on the road.  It should help with whatever non-commuter business you can generate though.

    I'd hire a real marketing pro well before you launch, while you can still tweak strategy and messaging.

    One other note on your employees.  There's been an ongoing story for the last year or two about a lack of summer workers on the Cape.  The news has featured stories about restaurant customers facing longer wait times and restaurants reducing hours.  You can fix that with above-average salaries, but you have to balance that with reduced profits.  Oh, the JOYS of retail!

    I don't have any insight into cap rates in Bourne, but I picking out locations is a different story.  Self promotion isn't allowed here, so that's all I'll say about that.

    0Reply
  • Ali L.
    Investor · Brooklyn, NY · Member since 2016 · 121 posts · 31 votes
    8y

    Pessimistic but mostly realistic feedback

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    It's a common theme. People want to retire from the JOB and own a food business. Problem is most of them have little to no experience running a place or what it entails.

    I know tons about the business as that is what I did before getting into commercial real estate about 15 years ago.

    Most food places go out of business. The ones that do survive 80% plus are owner operators meaning they are the business and have just a few employees. If the business flourishes 50k to 80k owner income a year can be possible. There are professional business owners that can do much better but they tend to own many locations where they can scale and put in structure to get more passive and away from day to day activities. I have seen a few make a ton with one locations but those are rare and not the norm.

    The dream in your mind might not match up to the reality in real life of how it will go. Maybe you should join the local business council there to glean more insight.

    I have friends that watch as people open up their first shop and then they come in 6 months later for a Subway and buy for 50% of build out cost for a discount. The food business can eat people alive if they do not have experience. Coffee is a volume business as the price point is smaller.    

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