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TOPIC: Lease vs. Purchase

Lease vs. Purchase 08 Mar 2004 20:32 #28593

  • WGA
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If this has been posted before, please just tell me it has and I'll go find it. I wanted to know what members think the pros and cons are of leasing vs. purchasing the property. I am sure I am not thinking of some detail that might be important. I believe I would rather purchase outright than lease. thanks,

RM
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Re: Lease vs. Purchase 09 Mar 2004 10:23 #28594

  • jimor
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Leasing versus buying is a typical business decision: there are pros and cons to both. While it is true that in the case of one's home, it is almost always best to purchase if one can, as opposed to renting, it is not always the same in regard to businesses, especially as regards standard office or retail locations. BUT, the exhibition business is NOT typical of most, since it requires a very special type of location that is usually not easy to convert to other uses, especially if it has the desireable raked or stepped floor as in 'stadium syle.' You will quickly find out from any lender that funds are much more restricted if you build with a special floor for the reason that it is harder for the lender to reposess if he has to and then be able to quickly sell it to someone so as to recoup their loan, since the lender would almost certainly have to bear the expense of flattening the floor, if that is possible at all, for a prospective tenant/buyer. If you can rent such a special floor space (and theatres/cinemas are virtually the only ones to have them) you will be in a better position to take advantage of the charms of renting/leasing.

Leasing offers the advantage that it is cheaper especially for tyros who are getting to know things, such as the importance of location. If it is a former cinema that one truly believes he can re-open with a business plan superior to the one that failed there, then you are ahead of the game. Leasing also allows one to invest a smaller sum and find out if the business is really for him; it is NOT as easy as it looks! Contrary to the way it may appear, one cannot just sit back and expect the crowds to flood in and the money with them. Also, if the building suddenly displays expensive-to-fix problems, they may be the landlord's responsibility, depending upon the terms of the lease you signed. But then, will the landlord live up to the lease within your lifetime?! 'Caveat emptor!'

There is greater satisfaction in owing one's own property, of course, but also a lot more risk. Not only does it cost more to buy, but one assumes all the risks of building or buying a workable structure, paying for the mistakes he will inevitable make, satisfying the local codes, etc., and paying the taxes. If one has been in the business before, the risks of buying may be much less since experience accounts for a lot in knowing where to locate, what type of building will satisfy the local audience, as well as giving them what they will pay to see. But perhaps most appealing about building/buying (assuming one has the money) is that one is one's own master to the extent that is possible these days. Few things are more galling than to set up a successful location, and then find that the landlord wants you out since he has seen your success and figures 'why can't I do what he's doing and keep all the money?' (as happened to the former operator of the AVALON Theater here, when the landlord saw the profitability, but then the landlord took over and the place went bust.) Likewise, if there is a roof leak or some other problem, you can decide when it is best to close up shop on your timetable, if necessary, and just what expense is necessary to satisfy your needs, as opposed to the landlord's, which could be quite a different matter!

If you are experienced, have very good financial backing, and love the business, it is best to buy. If these are not your situation, leasing may be best for a while, at least. Best Wishes. Jim
Jim R. (new E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) member: www.HistoricTheatres.org
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Re: Lease vs. Purchase 09 Mar 2004 10:52 #28595

  • BECKWITH1
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You are lucky if you have the choice to lease or purchase. For many of us that is not possible. Most existing theaters in my area are already located in shopping plazas making it difficult to purchase them unless you have the bigger financial backing to buy the whole plaza adding millions more to the cost and increasing the risk as becoming a landlord is not the same business as a movie theater. Ignoring the plaza theaters and building your own in the same area would be very dangerous as you would have to compete against the existing theater for film product and patrons. (If you are a large chain with lots of financial backing you can ignore this advice as you will be overbuilding the existing theater and putting it out of business.) Landlords with existing slope floor space to rent have every incentive to find a new tenant to compete against you so don't count on an empty building staying empty forever.

If you are looking in another type of area where you are the only theater and the previous owner/operator wants to sell, the advantage goes to buying as you will want as much control over your building and fixtures as you can get if you plan on running a good business. Leasing helps you figure out whether your business will work. Perhaps a short term lease with option to purchase would be best since you get the best of both worlds. Additionally, I think it would be easier to get your bank financing for the purchase with financial information that shows exactly how you did at that location. Banks love that since there is less risk to them. Keep in mind that if you buy, someday you will want to sell. If your theater fails anytime in that period it will be more difficult to sell and you may get nothing out of the building. Don't buy with the idea of building up equity in the building that you can cash in many years from now. A lot can happen to make that building an albatross around your neck.
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Re: Lease vs. Purchase 09 Mar 2004 16:24 #28596

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Thanks for the info! I will admit, I was thinking about the last couple of lines of Beckwith's statement. I was thinking about if things were to go to the downside, that it might be better to have the property as an asset rather than an obligation to make future payments. I thought it might be easier to obtain investment/financing with the property being an asset (collateral). My thought was that if the business were to go bad, that amount could be sold off to pay back investors. I did assume about the repair aspect. I knew there had to be more things than I could come up with to think about. Thanks. Oh, and I am looking at a conversion of a retail structure with no other theatre in town.
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Re: Lease vs. Purchase 09 Mar 2004 19:16 #28597

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I'm thinking about alot of these issues too, and for me it makes a whole lot more sense to keep as much cash on hand for the first 12-18 months than to put it into a downpayment for property.

/mumbog11.

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Re: Lease vs. Purchase 10 Mar 2004 21:43 #28598

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Start up costs for my location with a lease, $300,000


Start up costs for my location by buying the property, $5,000,000
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Re: Lease vs. Purchase 14 Mar 2004 19:05 #28599

  • Mike
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We own one theatre and lease another. The lease rate is less than our mortage but we negotiated hard as we had to put a lot of money into the place and we'd be left with nothing after 10 years. We were leasing a derelict space that we had to completely renovate. So: our rent is 700.00 per month for year 2 going up to 1200.00 on year 10 with heat included. Buying costs more but long tern is an investment whereas leasing is about how much can you make in that time frame?

Michael Hurley
Impresario
Michael Hurley
Impresario
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Re: Lease vs. Purchase 15 Mar 2004 07:12 #28600

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found this at http://www.dejeanandnorris.com/CM/Custom/TOCRealEstateFAQs.asp?archiveposition=7&link=http://fsnews.findlaw.com/portal/topic.xml?tid=10&cre=2003-09&ss=fln-archived-faq-articl e-text.xsl

Factors to Consider: Lease or Purchase of a Facility

Factors Favoring Leasing:

* Cash flow. A business can conserve its cash flow by leasing. Under a lease, the initial cash expense for the facility will be a month's rent and a security deposit.

* Credit rating. The company has not established a credit rating sufficient to support a mortgage.

* Maintenance. The landlord is responsible for maintaining the property.

* Property. You have been unable to find a suitable property that is for sale.

* Real estate values. The facility you've found meets the needs of the business but is located in an area where property values are declining.

* Mobility. You're not sure that the facility will meet the future needs of the business.

* Tax Savings: Rent is deductible as a business expense.

Factors Favoring Purchasing

* Long-term savings. In the long run, purchasing a facility is usually cheaper than leasing. In a lease, the landlord attempts to build a profit for himself into the rent. Payment of this profit premium can be avoided by buying the facility.

* Location. For certain types of businesses, location is the most important factor. If you've found the perfect location for your business and established the business there, purchasing the property will ensure that the business will not have to move.

* Control. There are substantial renovations that you want to make to the property, or you may want to control your own business hours and the way you do business. By purchasing the property, you have control over these matters (subject, of course, to local ordinances and zoning boards).

* Property. You've been unable to find a suitable property to lease.

* Real estate values. You've found a facility that meets your needs and is located in an area of appreciating land values.

* Tax savings. Depreciating the property over time may bring you tax savings. In addition, if the property is financed, interest based deductions are available.

The Economics

You gain the use of an asset whether you lease or purchase a facility. The main advantage of leasing is that your initial cash outlay is less than if you purchase. The main advantage of purchasing is that in the long run you end up paying out less than if you had leased, plus you get the benefit of any appreciation in the value of the property. Perhaps the only way to decide which is the right avenue for you is to compare the economics by doing a cash flow analysis. This will provide you with an estimate of the amount of cash you would need to set aside today to cover the after-tax costs of each alternative.

[This message has been edited by mumbog11 (edited March 15, 2004).]
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Re: Lease vs. Purchase 15 Apr 2004 09:50 #28601

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I am investigating whether to purchase a building that contains 1) an old movie palace that was shut down in 1962 and needs tons of work and 2) 3 floors of "rooms" that can be converted into 9 studios and 1BRs that can be rented out - the rental $$$ will pay about 95% of the debt service for the building. I'd like to turn the movie palace into an over-under 2 screen art-house theatre with a wine-bar/lounge.

There is no other art house theatre for a 30 mile radius, the area is a "fringe" area that is getting better but is not great. The city undergoing a revitalization - lots of artists and upper income people moving in to converted mill lofts about 2-3 blocks away. Parking is somewhat tight during the day but better at night.

Does anyone know an average sq footage renovation cost for a theatre? Or is a total range?
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Re: Lease vs. Purchase 16 Apr 2004 06:55 #28602

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bemily,

I would say that there really isn't enough information given to give you a useful answer. I've seen renovations for theatres of the type you describe run anywhere from $50,000 to $5,000,000.

What shape is the physical building in? Will it need to have all of its mechanical systems refurbished or replaced? (Electrical, plumbing and HVAC.) Will there be asbestos removal? And that's just the physical side of things. What shape is the booth in, what equipment, is it in working order, etc.

We've done a renovation on our local movie palace, and I've helped several other theatres in our area do the same. If you'd like to hear more about what we've done here, feel free to email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Take care,
Rance
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Re: Lease vs. Purchase 16 Apr 2004 09:20 #28603

  • D. Bird
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www.theempiretheatre.com

Old live+movie "neighbourhood palace" in Ontario Canada closed in 1961 and re-opened for stage/music/film in 2003. Believe it cost them $1.8 million CDN. It is absolutely stunning. Not a whole lot of structural, she was mostly intact, floor rake was filled with sand - capped with concrete, so that was easy, they did spend nearly a half million on sound board, speakers and "deadening" the acoustics. The owner is a musician and wanted to be able to book acts with ease. It is concert quality sound and the acts can just "show up" and play. It's working, they're getting some good names, and the theatre is wildly successful. Changeover house for weekly movies.
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Re: Lease vs. Purchase 16 Apr 2004 12:05 #28604

  • rodeojack
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Don't forget to figure in the cost of ADA compliance when you work up your numbers.

There are a couple of really nice old single-screen theatres around here that are just about unsaleable, because ADA compliance would make remodeling insanely expensive... way too much to be supported by their markets.
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Re: Lease vs. Purchase 16 Apr 2004 13:43 #28605

  • bemily29
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well, I'm figuring $1.4 mil for purchase ($575k acquisition + $875k build out of theatre AND residential units). I'll have 3 screens - one of which may not be handicap accessible - but if the other 2 are it's fine b/c i'll rotate to the other screens (another theatre 35 miles away does the same thing). I want to bootstrap as much as possible - go functional and restore the bells whistles, glitz and glam gradually. The developer i'm working is going to get a hard estimate of the theatre rehab.
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Re: Lease vs. Purchase 12 May 2004 13:55 #28606

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Our 1-screen theatre we own, our 4-screen we lease the building. We aren't too crazy about leasing our 4-screen. The mall we are in seems to have problems keeping businesses in and keeping them. Not to mention, they are going to be raising our rent soon, and it does not seem like our benefits will increase. That is why we are currently looking into the possibilities of building a new theatre. We figure we would be better in the long run to pay a mortgage then we would to continue to pay rent. Also, we would have difficulty expanding our theatre in the mall. At least with a new building, we can build extra screens if we needed to. I guess as far as leasing or purchasing, weigh the pros and cons and pick the one you think would work out best for you.
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