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After last week’s post on the Economics of the Atlanta Tech Village a number of people provided great feedback and ideas. With a 100,000 square foot facility, there’s no shortage of cool and interesting things that can be done.

Here’s some of the feedback on the economic model:

• Building operating costs will be higher for things like utilities and cleaning fees since the building occupancy will significantly increase (expected annual increase of $50,000)
• Insurance costs weren’t listed and are going to be much higher than a normal building due to so many coworking tenants (expected insurance costs of $40,000 – $50,000)
• Building repairs reserve fund wasn’t listed and is needed for bigger occasional projects like resurfacing the parking deck, replacing the roof, etc (expected annual costs of $50,000)
• Commissions for real estate brokers are needed in the budget if we lease out traditional suites to tech companies (we have two good suites in the building available for lease to cool companies with 15 – 30 employees)
• Sponsorships from service providers are a good opportunity that could result in $50,000 – $100,000 in revenue (e.g. lawyers, accountants, PR, marketing, banking, commercial real estate, wealth management, etc)
• Event space and training lab rentals are another opportunity that could result in $10,000 – $25,000 in revenue
• Memberships other than renting desks, rooms, and modular suites like part-time access, weekend/evening access, mailing address services, and affiliated tech company involvement could result in $25,000 – $50,000 in revenue

Based on this feedback I believe expenses and revenue will be higher than previous listed, ideally off-setting each other.

What else? What are some other economic ideas for the Atlanta Tech Village?

One of the great things about being an entrepreneur and building a successful company is the ability to support charities and other non-profits through gifts of time, money, and equity. Donating equity is an interesting issue as there are considerations around doing it early when the business has little value vs doing it later when the company is valuable.

Here are some considerations around charitable donations of startup equity:

• When donating equity at the beginning of a new startup, there’s less drama and concern about giving up a ton of value. From a tax perspective, there isn’t much charitable deduction since there isn’t value but you also don’t have to pay taxes on that percentage when you sell the business such that the charity will receive more money
• Here’s an example: donate 1% of the business to charity at a value of $10, sell the business for $10M, that 1% is worth $100,000, and the charity gets all $100,000 with no taxes vs not donating the 1% initially, paying 23.8% – 35% long term capital gains on the sale of the business, and then donate the equivalent of 1%, which is roughly $76,200, and then getting a limited tax deduction from that donation)
• When donating equity just before selling a startup, you get the full deduction of the valuable business, the charity (including potentially your own charitable private family foundation) get 100% of the proceeds, and you don’t pay taxes on that equity donated (e.g. right before you sell your business for $10M you donate 1% to charity and take a deduction on the then business value, the charity gets the full donation, and you don’t pay any taxes on that piece you donated)

My personal lesson learned from my experience selling Pardot, and desire to donate to non-profits, is that I would have paid fewer taxes and the charity would have received more money if I had donated equity just prior to the transaction. If you’re thinking of selling your startup, or are about to sell it, go see a good tax and estate attorney.

What else? What are your thoughts on charitable donations of startup equity?

The Atlanta Tech Village has officially been open for pre-sales for 72 hours and we’ve sold 36 memberships (desks). During this short period of time we’ve done a number of customer discovery interviews as well as tours of the building. We’ve already learned a ton of interesting things.

Here’s some of the market input and feedback about the Atlanta Tech Village:

• People overwhelmingly love the idea and are excited about a new community and place for tech companies, startups, and tech-related service providers to interact and grow
• $250/person/month for a simple desk, chair, and internet with a 90-day pre-payment is a no-brainer — there’s nothing else like it on the market
• People are willing to pay extra for upgrades like receptionist services, faster internet, more shared conference room time, etc
• Unreserved desks and private offices for 1-3 people work great for smaller tenants but don’t meet the needs of companies that have 5 – 25 employees, yet three different entrepreneurs with companies in that size range came by wanting space (Atlanta Tech Village is going to support this size segment after renovations this summer)
• Several people reached out about paying for private suites in the 600-1,000 square foot range even though they only had one other colleague, showing that there’s demand for potential members that want to pay for larger space that isn’t purely a per desk pricing model

One of my biggest takeaways so far is that a pure per person per month pricing model won’t work for all the space in the building. Potential members are interested in a variety of options including large areas for a small number of people as well super-packed areas for interns, and a semi-flat per person per month model doesn’t accommodate the different desires. I do believe the blended $400/person/month is still the right way to think about it but that it’s going to come from renting desks, renting rooms, and renting suites with everything fully furnished and wired.

What else? What other market input and feedback have you heard so far about the Atlanta Tech Village?

The Atlanta Tech Village is a social enterprise designed to enhance the Atlanta technology and startup community while also generating a return on investment. Being a double bottom line business, which is a first for me, generates many interesting questions, especially around how much do we subsidize tenants, or certain tenants (like startups), vs focusing on a target percent investment return (e.g. 7%).

One idea is to be more open and transparent about our costs and revenue, the economics of the business, so that everyone can better understand how it runs as well contribute ideas to make it more successful.

Here are the economics of the 100,000 square foot building, 90,000 square foot parking deck, and 1.42 acres of land (the land comes into play as part of property taxes) on an annual basis:

• Property taxes: $260,000
• Utilities: $200,000
• Janitorial: $50,000
• Security: $40,000
• Miscellaneous contracts (landscaping, elevators, etc): $50,000
• General repairs: $50,000
• Property management: $100,000
• Total: $750,000

So, $750,000 per year to break even as a generic office building.

If it is a generic office building, purchased for $12.5MM, and annual expenses of $750,000, to make a 7% per year return on investment, it would need to have rental income of $1,625,000, resulting in a profit of $875,000.

Now, add in the extra annual costs to run it as a tech hub, event facility, coworking space, etc:

• Staff: $200,000
• Gigabit fiber internet: $100,000
• Consumables (food, supplies, etc): $50,000
• Total: $350,000

The grand total is $1,100,000 in expenses per year to break even.

Now, with a $4,500,000 renovation (interior, exterior, lobbies, bathrooms, furniture, audio/visual, etc), for a total investment of $17MM, and annual operating costs of $1,100,000, to generate a 5% per year return on investment instead of 7%, it would need rental income and membership fees of $1,950,000, resulting in a profit of $850,000.

If the building was purely Atlanta Tech Village memberships, and had a maximum capacity of 400 members based on the size of the parking deck, fire code, etc., memberships would need to have a blended average fee of $4,875/member/year or approximately $400/member/month. Due to the volatile nature of technology companies and startups, churn is going to be a challenge, resulting in the need for a solid waiting list such that when members leave, new members are ready to take their spot.

Membership costs would vary from $250/member/month to $600/member/month depending on the type of membership resulting in a blended rate of $400/member/month.  Is $400 per month per person viable? Yes, flex office space is significantly cheaper than traditional office space and the value of the ATV community will make being in the building significantly more valuable. Comparable space for a 1-30 person company in Buckhead rented with a long lease term, furnished, and outfitted with fiber internet would run $600 – $800/employee/month (one of the reasons it is much higher is that there aren’t the same economies of scale with a receptionist/office manager, fiber internet, leasing space vs owning the building, etc. for a smaller company).

So, in the end, I’m confident that the Atlanta Tech Village will be a successful social enterprise that becomes the number one tech/startup facility in the southeast within five years while also providing a modest return on investment.

Note: this analysis leaves out the benefit of depreciation expense which is off-set by reduced income during the renovation and ramp-up period.

What else? What are your thoughts on the economics of the Atlanta Tech Village?

Update: see the additional ideas on the economics of the Atlanta Tech Village.