As a new amusement developer there are two rocks on the road; Location and Funding. You can find some great information on the process of funding in the Finance section, here we are going to address the first question when it comes to location… Lease vs. Buying.
For most new fun center developers looking to start an attraction business under a million dollars, the costs of buying a building are well beyond their financial means, and for that matter, beyond the projects initial demands to create a profitable and successful entertainment center.
Many successful FEC’s operate in lease space, because for one – leasing provided a path to opening their business much sooner and easier than the process of acquiring a building of their own. Not in every case, but unless you are developing a multi-million dollar 30,000+ square foot attraction, leasing can provide the best option to getting started.
5 Key Points to Consider
There are pros and cons to both options, and the best choice depends on your specific needs, goals and preferences. Here are 10 key points to consider when comparing lease space vs. building owning for fun center developers:
1. Cost: Leasing space is usually cheaper than owning a building in the short term, as you only pay rent and utilities, and avoid maintenance, property taxes and insurance costs. However, owning a building can be more cost-effective in the long term, as you build equity, benefit from tax deductions and depreciation, and have more control over rent increases and operating expenses.
2. Flexibility: Leasing space gives you more flexibility to relocate, expand or downsize your business as your needs or market change. You can also choose from a variety of locations, sizes and types of spaces that suit your budget and the design and layout of your attraction mix.
3. Control: Owning a building gives you more control over your space, as you can customize it to fit your brand image, operational requirements, attraction mix and design, along with customer expectations. You can also make improvements or modifications without seeking approval from a landlord or complying with lease terms. Leasing space, however, restricts your control over your space, as you have to follow the rules and regulations of the landlord and the lease agreement. You may also have to deal with issues such as noise, parking, security and maintenance that were not initially apparent, but are beyond your control.
4. Risk: Owning a building exposes you to more risk than leasing space, as you are responsible for the upkeep, safety and value of your property. You also have to bear the financial burden of mortgage payments, interest rates and market fluctuations, which can have an impact of revenues. Leasing space reduces your risk, as you can easily terminate or renegotiate your lease if your business faces financial difficulties or changes in demand. You also avoid the hassle of dealing with property management and maintenance issues.
5. Growth: Owning a building can facilitate your growth, as you can use your property as collateral to secure financing for expansion or diversification. You can also generate additional income by renting out unused or excess space to other compatible tenants. Leasing space can hinder your growth, as you may face limitations in terms of availability, affordability and suitability of spaces that match your evolving needs. You may also have to pay penalties or fees for breaking or modifying your lease if you want to move or change your space.
Which is Right for You?
Owning your own building can give you a sense of satisfaction, pride and stability. You can enjoy the benefits of equity, appreciation, rental income, tax breaks and control over your property. However, owning also comes with some drawbacks, such as a large upfront investment, difficulty qualifying for financing, prepayment penalties, liability insurance and potential loss of liquidity or capital.
Leasing space can offer you more flexibility, convenience and cash flow. You can avoid the hassles of maintenance, repairs and property taxes, and you can relocate or expand more easily if your business needs change. You can also deduct your rent payments as a business expense. However, leasing also has some disadvantages, such as no equity, no appreciation, rent increases, landlord restrictions and uncertainty over lease renewal.
So how do you decide which option is right for you? Here are some factors to consider:
- Cash flow and budget: How much can you afford to spend on your commercial space? Buying usually requires a larger initial outlay than leasing, but it can also save you money in the long run if the property appreciates or generates rental income. Leasing usually requires less upfront cash, but it can also cost you more over time if the rent goes up or you have to pay for improvements.
- Your growth plans: How long do you plan to stay in your commercial space? Buying makes more sense if you intend to occupy the property for a long time (at least 10 years) and you don’t expect major changes in your business size or location. Leasing gives you more flexibility if you need to move or expand in the short term (less than 10 years) or you want to test the market before committing.
- Your risk tolerance: How comfortable are you with taking on debt or liability? Buying involves taking on a mortgage loan and being responsible for any damages or issues that arise on your property. Leasing involves signing a contract with a landlord and being subject to their rules and regulations. Both options have some degree of risk, but buying generally exposes you to more financial and legal obligations than leasing.
- Your personal preference: How important is it for you to own your commercial space? Some business owners value the sense of ownership, security and autonomy that comes with buying a property. Others prefer the convenience, simplicity and flexibility that comes with leasing a space. Ultimately, you have to weigh the costs and benefits of each option and decide what makes you happy and satisfied.
From our experience over the past 28 plus years, if you are a smaller, independent new startup/amusement business developer, securing lease space is by far the easiest, most cost-effective way to get into the business.
Once the initial project has proven successful, loction #2 is a completely different story.