Financial models for temp use – casestudy, Practice Space

For Detroit-based entrepreneurs Practice Space is an incubator programme, helping to develop a business strategy; for the designers who take part in its residency programme, it offers alternative vocational training, as they spend a year working with the entrepreneurs on their business concepts and designs for their business’ space.  This case study looks at the first year and a half of the project, as the idea was developed and then realised, with Practice Space opening its doors in September 2013. It is part of research into financial and business models for temporary use projects. This project is funded by a grant from the Creative Industries Fund NL (Dutch).

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Read the full case study on issuu here, or scroll down…

The business of temporary use – case study Practice Space by Killing Architects is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

Practice Space

Justin: Before we even met we had this growing interest in architecture and the potential for architecture in Detroit. Those early thoughts were happening while we were at University of Michigan. I was in the Master’s programme for Architecture, and before that business entrepreneurship. Austin is coming from the business school, but was also starting to take an interest in architecture. So we met through that common interest. We had done a university design project for the façade of this building and then we started with a group of around 12 people talking about figuring out a way to use it. At the time, I was working on a couple of other projects and Austin also had some other things going on, so we saw it as a side project.

One of the things that became apparent very quickly was that people loved the idea of a collaborative co-working space, but Austin and I were finding ourselves taking this conversation extra seriously. We were starting to think through, ‘how can the dollars and cents work? How are we going to make this happen?’

Austin: And seeing that we both had some business experience, we were thinking of it in terms of a business operation.

Justin: This was the spring and summer of 2012, so over a year ago.

PS_Total_income_vs_cash_incomeWhere the money came from to fund the project and when it came in, in relation to key project milestones.

Developing the business idea

Justin: One of the things we knew right away was that neither of us were naturally inclined to be starting a non-profit. We always were thinking, ‘how does this contribute to a larger opportunity for architects and business development in Detroit?’

First it was going to be a collaborative working space for a collective of architects and developers. We were thinking through the business model of that, and also thinking of our own experiences in co-working spaces and realising that there’s just a lot of things missing there. There’s really no reason to collaborate with someone just because you sit next to them. And that felt like a huge loss for us. We were also starting to realise that there were all these people doing amazing things in the city, but it seemed like all these things were happening independently, so people were all learning hard lessons on their own, not coming together and sharing those things. So that’s when we came up with this idea for a programme.

Over the next 8 months to a year, Austin and I spent our time both working full-time jobs, doing this evenings and weekends, trying to find the right space. We spent 5 or 6 months fund raising, putting together our own investments, raising one private investment and one private loan to fund what we needed to do. Almost all of that while we were working other jobs, until we opened doors a few weeks ago.

Austin: We spent a good amount of time, over 8 months, where we were really diving in conceptually, trying to understand what we ultimately wanted to accomplish. Quickly we realised in terms of just getting things done we needed to work full-time . We had reached a limit as to how much we could accomplish on such limited time. In January of 2013 we decided to give ourselves the summer to really do the pre-launch of Practice Space, and then see if we could actually recruit the clients that we needed by September. But leading up to that summer we created some self-imposed deadlines where we said by such-and-such date we need to locate a space and we also need to raise the funds necessary.

Finding the space

Justin: It’s weird because in a city that has so much vacancy, it is insanely difficult to get a space. I think those things are related, but not in the way that everyone thinks they are. Everyone thinks the assumption is there is so much space, it must be easy to get it. Part of the reason there’s so much space is people have left town. Part of the reason there’s so much space is that people are hanging on to those spaces. They’re not selling them, they’re not leasing them. We tried to buy this building and couldn’t come even close to a reasonable agreement. We had a realtor who had been here tell us what he thought the building was worth. The owner wanted four or five times what the assessed value was.

Austin: We walked away, originally.

Justin: The next stop was an old school building that a developer was buying. We were going to lease the whole third floor. But then that was hit by scrappers who did some damage to the building and the developer backed out. Then we were going to go into a different old school building. The bank had set this criteria that if the building owner could get a tenant at a certain rate, then they would loan the money for the improvements. But then the bank backed out. Then we were going to be in this office building, but it was way too expensive. Then we came back here.

Accessing empty space in Detroit

[ AK: Are owners still kind of tied to the idea of “I paid half a million dollars for this space, I’m not going to rent it out”?]
Justin: It’s more like, I bought it for 5 thousand dollars, so why sell it until it’s worth a million dollars. Everyone saw dollar signs; they saw opportunity when they were able to buy buildings for so cheap. But it’s had this reverse effect where in many cases there was very low cost to keeping, owning those properties. The taxes are really cheap and you can get away without paying them for a long time. So people are like, I’m just going to hang onto it until the rest of the neighbourhood comes back. So when the whole neighbourhood is doing that, nothing happens. Everyone wants the building next door to make the investment, to make the neighbourhood more valuable, without being the person to do that themselves.

Austin: The other challenge is that people see amazing potential in these spaces, but then they don’t really understand the costs associated with redeveloping those spaces. And in some cases it will cost several times more to do the renovation work than it would to do new construction.

Justin: You can buy something for 5 thousand dollars, but it needs 200 thousand dollars’ worth of renovation. So I think that is the thing that confuses a lot of people. At times you’re tempted to say I wish they’d make it harder for people to buy buildings. I wish that buying a building came with a responsibility of knowing first what it would take to do something with it. But then that doesn’t seem like a good solution either, because then you’re creating a barrier. I don’t know, we’re not the experts on this, yet.

PS_Cash_in_bank_vs_cash_expenditureThe project’s cash flow

The next space

Part of our vision is to get our own building where we’re able to lease some of the space [to other young companies]. We realised that one of our opportunities for growth is, to let the programme be this core, and then create spaces around that for people to move into with their own offices and that’s an opportunity for us to build some of our own equity, make some money back.
So we didn’t want to tie our hands [by having a lease longer than the current three year one], that would prevent us from being able to do that. It’s hard now, though, because now that we’ve spent the time to make this [space] how we want it, really we have to start looking for this next space.

PS_Cash_expenditure_vs_income_sales

A lot of money was needed at the start to get the project going, at a point before it was able to start generating revenue, so that other sources of income were needed at the start – eg loans, grants and investments by the founders.

Getting the initial investment

Austin: It was a $50,000 private investment and a $50,000 loan. Then we invested a bit of our own money as part of our capital contribution. I think altogether it was $105,000.

Justin: That went to pay for the entire build out. That’s paying for some working salaries so that we were able to quit our jobs. That’s paid for framing, infrastructure, everything…

Justin: Hiring a few additional team members and a little bit of a buffer to keep us until we’re up to full operational capacity. So right now [we have] 1 project and 4 residents. Starting in January we’ll have 2 new projects and 4 new residents, so 8 total. In May we’ll have 3 projects and 12 residents total. Our goal is that at that point, when we have that group of people together, that group pays for all of the space, and for the people that are required to operate it.

Renovating and fitting out the space

Austin: The actual rent, the average of what we’re paying, distributed over the 3 years, is $1,286 per month. But we prepaid 2 years’ worth of rent up front, which helped kickstart a lot of the major building improvements that needed to be made before we could have access to the space and do our interior fit out .

Justin: So the building owners said, ‘yeah, this sounds great but I’m not going to take out a loan to do all these building improvements. You can prepay your rent’. So he took that cash, and put in heating and cooling, did the plumbing, did the electric, and the garage doors.

Austin: The basic infrastructure to get things up in order.

Justin: The build out cost thirty thousand, including the labour.

Austin: We did a lot of the work ourselves. But we did hire an electrician, a metal worker to do all the steel too, a carpenter. We stacked [the plywood for] these walls ourselves. We put a lot of our own sweat into it.

Going full time

Austin: We started working full time in April of 2013.

Justin: I left my job on April 1st,, working as an architect in town.

Austin: I was working at a bakery, so it was really flexible. For April, May, June, and July. I went down to 2 days a week. And then in August I went down to one. From September I was full-time. I sort of weaned off.

Justin: Part of the dynamics to it, I think Austin is in the more traditional start up lifestyle role in that he is just out of school; he’s young and single. But I’m married and I have a 1-year-old. So that did come into the dynamics of figuring out how to stage it. It’s just different when you have mouths to feed.

One of the things that we really had to sort out very carefully was how to stage, by the week or by the month, all the things we were ramping down or ramping up, so that our cash flow wasn’t running out. Because we didn’t get the investment and the loan all at once. It was conditional [on securing a space] and structured over the summer. [For the loan] we have a 2-year grace period, and then we have 10 years to pay it off.

DSC_1691The space used to be a auto-repair shop.

The Practice Space team

Austin: Justin and I, we’re partners. We have a third additional partner who made the investment and he’s transitioning into a full-time role. Then we have 3 additional people. One is Alex, our communication designer. Very quickly we realised that Practice Space is a concept that we need to show to people, to introduce them to how it functions. We realised that we needed to bring on a dedicated designer, who could focus on how we should tell the story of Practice Space. Alex has been really instrumental in helping us tell that story through video, through photo, multi-media.

Justin: That’s for thirty hours a week.

Austin: And we viewed it as a designer in residence role, meaning there was a time frame attached to it, 4 months. And now we’re looking at possible extending it a couple of months But it started as a short-term kick start to help us really get the word out and make things visual. Then the other major hire was Kyle Hoff. His role was overseeing the build out of the interior space. We got the keys in August, and so we had one month, literally, to build it out.

Justin: And really, we got the keys a week into August. We had 3-1/2 weeks to do all of this.

Austin: So a lot of pressure. Kyle was working as a full-time architect in Chicago for a large firm. We were able to convince him to drop that to move here for very limited pay. He saw it as this formative experience. He ultimately wanted to break out on his own, so to have the ability to produce a project like this with a $30,000 budget, that was enough to convince him to join this effort. So he’s our designer in residence. He’s here through October and then transitioning into something new.

Justin: He’s getting into his own practice.

Austin: He’s finding work now, because he’s in Detroit and this project has put him on the map, to a degree. Also, we have one other person help us, who is a friend of ours. He’s still in school, and he’s an art student. But other than that, it’s pretty much a small team effort.

PS_AssetsThe fixed assets (eg the space fit out) slowly depreciate over time, but its total assets are fairly stable because the project has a regular income stream.

The Practice Space model

Justin: We structured this as a pay-to-participate model. So all of the people who are participating in the programme pay a fee to be a part of it. For the projects, they’re paying to go through the 4 month incubator where they’re creating their business and building concept, formalising that into a concept design, a little bit of a schematic design, and a business plan. It allows them to go out and raise the money and get the partnerships they need to launch the business.

And then for the residents, it’s sort of an alternative vocational training. There’s this huge disconnect between what was being learned in an academic environment and the kinds of things you need to know to do work in a place like Detroit, work that really matters on a grassroots level. So we set up the residency as a 1-year vocational training, and figured what better way to learn than on actual projects.

So that’s how those two are paired up, and there’s a tuition they pay to be a part of that. For the incubator projects, it’s $2,000 per term. And then for these residents, it was $6,000 for the whole year to be in the programme.

Business vs non-profit

Justin: This is a business, it’s not a nonprofit. Because one of the things that was always important to us is we feel that Detroit needs more businesses. There are plenty of charitable organisations that are doing great stuff, but they’re all competing for the same money, so we wanted to start something that could sustain itself. But there have been a number of really big challenges with that.

One thing that’s come up a number of times is there are certain activities and programmes that we think are possible now that we’ve set this up, that would look like they’re non-profit. So one of the things we’re exploring and trying to figure out is, how do we create this interaction between our for-profit business, but also adding some non-profit entities that are affiliated with it?

Starting small

Justin: Initially we were imagining starting with a group of 12, based on the whole year, working on 3 projects, but all of a sudden we realised there were a lot of huge challenges to deal with. I think the main one is that you spend that whole year preparing that one group, and then when they leave you start completely over with the next group.

One of the other disadvantages of the group of 12 is you are with just those 12 people that whole time. Whereas with the staggered model, I think we calculated you end up working with 24 different people [over the course of the year]. So it keeps it more fresh. You’re getting a lot more learning experience from the people you’re working with.

From a business model standpoint, we realised how difficult it was going to be to recruit 12 people for this first programme. This first group I think are going to be unlike any other group we have. Because this was the one group that was asked to imagine what this would be like without being able to see it. Whereas from now on, we’re able to invite people here to come see it in action. We also realised that starting with one project and 4 residents, is giving us a chance right now to pilot and be nimble, and then ramp up to 3 projects and 12 residents.

PS_Paid_vs_unpaid_timeThe amount of time that everyone involved in Practice Space (staff, residents and the entrepreneurs taking part in the incubator) put in.

Professional advisors

Austin: We have professional technical business and architecture advisors who have made a commitment to participate in pin-ups, which happen on a weekly basis. There’s :five phases or stages and a review at the end of each stage. The advisors have made that commitment to attend those for free. But in exchange for offering their services, offering their time and attention, there’s a lot of value to be gleaned . in the instance of Christian Unverzagt, who is one of our lead advisors, who teaches at the University of Michigan and is a practicing architect, we’re opening up the space for him to use the Practice Space as his own outpost. He’ll have his own mailing address here. He can post client meetings here. He can bring his class from the University of Michigan and they can have an off site studio here for a day or two. So there are those privileges attached.

And also, advisors are seeing it from a business perspective as a really unique opportunity to have access to these projects that are in development. Once these projects do graduate from the incubator programme they receive funding. And then they’re looking to hire out professionals to do the real architectural work or the real building work. And so that’s an opportunity. And also the pool of residents is an emerging group of young talent that are eager to get busy and find work. They’re seeing the residents as potential hires. We’re able to create a virtuous relationship.

Choosing the businesses for the programme

Justin: There’s 3 main criteria [for choosing the businesses for the incubator]. They have to be based in Detroit. We’re looking for place-based businesses or bricks-and-mortar. We’re looking for something that engages with the community, relies on its architecture. So it’s place based.

We’re looking for projects that are pricking and scratching (a very subjective term), at relevant issues in Detroit – things that matter, things that are interesting. So, tackling food systems, education, crime. These are things that are Detroit’s biggest failures, but therefore also the biggest opportunities to do things differently.

One really important thing is that we’re looking for projects that have already been investing and are midway through the process, not just starting. I think a lot of really good programmes are out there already to address the situation where, you know, I had this idea in the shower yesterday that I want to start a new roller skating rink. There’s classes and lots of things you can do at that point. But that’s not a great time to enter into our world. We’re calibrated for people who had that idea 2 years ago and have spent the last year or 2 years, or $5,000 or $10,000, whatever it is that they have, working towards it. And their first impulse was to do as much as they could on their own. Now they’re realising that to move forward they need to get other people involved. They’ve hit some moment where if this is going to happen, they’re going to have to get an investment or take on new people or bring in an architecture firm or whatever.

That’s the moment where we’re saying: Perfect! Come work through our programme before you just go out and sell half of your project to an investor, before you go out and hire an architect. Slow down for just one minute and think through the road map of the next 10 or 30 years of your business. So that as you begin to engage banks, investors, all these things, you have the ability to communicate your vision properly; you have a more explored version of what that really looks like. And you remain in the driver’s seat. You’re really in control of that conversation as it moves forward. So those are the 3 things we’re looking for.

DSC_0602The workspace and behind, the individual project rooms.

How Practice Space is different from other incubators

Justin: There are other incubators in Detroit and there are some other community design studios as well. One of the things that really sets us apart is that in our DNA, we have a bootstrapping, entrepreneurial attitude. I think in other situations the impulse is to look for the grant, look for the government partnership that can help do it.

I think the kind of place that’s supporting that group of people has to come from a mindset that’s more entrepreneurial and less grant-based, government-based, foundation-based. That’s not to say there aren’t good partnerships to be had with the foundations and grants, but I think if you look at some of the other incubators, a lot of these are from groups that are getting multi-million dollar grants from huge corporations in the City They’re picking up projects that are a lot different from the kinds of projects that we’re picking up.

Austin: There are other incubator programmes which are supported by public institutions. [They measure their success] on the basis of producing certain statistics, economic indicators, of how many jobs are created. That’s a comment on a lot of the grant-based incubator programmes that exist. They are very much inviting all types of businesses. They say, hey, come access our resources. We’ll help you get on the fast track to realising your business. But it comes with the caveat that they put a lot of pressure on these businesses to show signs of growth immediately.

We’re realising that there’s a lot of projects that need some breathing room before they can really take flight. ‘Incubator’ is a term that is derived from this tech theme. You hear this word ‘accelerator’ quite often, and we took an opposite viewpoint and term, calling it a ‘decelerator.’

In Detroit there’s an opportunity to do things fundamentally different. We can’t just do that in a few short months. You can’t just throw money at those kinds of problems [which the businesses taking part in Practice Space are trying to address]. You have to back people who have a real investment in these ideas.

So in the case of Eleni and Jenile, Eleni is seeing it as this real community space that she wants to create within a neighbourhood. And with Jenile, she’s trying to tackle this issue of food access. She has spent the better half of 2 years trying to do that. At first she received a $60,000 grant to do that, and she realised that just put a lot of extra pressure on her and didn’t help her address the fundamental questions of, ‘how do I find the right space? How do I create this partnership?’

We want to create an environment that allows people to move at a more natural pace, and I think you can only do that through creating that creative freedom to do that within a formative period. Which is why we have this named Practice Space. It is a place where we’re exploring new ways of doing things.

You can see Practice Space’s film about their first two entrepreneurs to take part in the programme here, and there are more films on their website.

 

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