Should You Buy the Building?
If you’re thinking about buying real estate, finance expert Ami Kassar has some guidance and some options for you to consider.
Good Morning!
Here are today’s highlights:
Could you be stealing wages from your employees without realizing it?
Some online retailers are banning customers for making too many returns.
Artificial intelligence is driving wealth creation, bringing back San Francisco, and targeting bed bugs.
Can employers afford to cover the new weight-loss drugs?
REAL ESTATE
Ami Kassar offers some options if you’re thinking about buying the building: “Recently, an entrepreneur who is tired of renting and is thinking about buying a building called to discuss his options. He wanted help figuring out if he’s qualified to get a loan and how much he could afford to spend. It turns out he can afford a nice big building, but buying one might not make the most sense for him. As always, the devil is in the details.”
“The entrepreneur’s business manufactures car accessories, with annual revenue of about $8 million and a profit of about $500,000. His current rent for space in an industrial building is $15,000 a month for about 14,000 square feet. The problem is that the space is divided.”
“This entrepreneur could consider buying a building about double the space he currently occupies by leveraging an SBA 504 loan. With an SBA 504 loan you can do a project of up to $12.4 million with 10 percent down. SBA loans must be used for owner-occupied real estate, but a tenant can take as much as 49 percent of the space.”
“There is a third scenario that my prospective client hadn’t considered. I encouraged him to think about how he might invest his $1 million of liquid cash in his business if he were not investing it in real estate. How could he use the money to grow and expand his core business?” READ MORE
HUMAN RESOURCES
Gene Marks asks whether you’re sure that you’re complying with wage-theft laws: “Wage theft occurs when an employer — knowingly or not — pays a worker less than what they’re legally entitled. It may be a simple shorting of hours worked or willfully pocketing tips, as was the case with Chickie’s and Pete’s. It can also involve misclassifying employees in order to avoid paying overtime wages. Under the current provisions of the Fair Labor Standards Act, any salaried workers with certain job titles and duties and that earn less than $684 per week ($35,568 per year) are entitled to be paid overtime for any hours worked past 40 in a week. These exempt employees are usually in administrative, professional, or executive positions.”
“‘Employers can also miscalculate paid time off, health insurance, or retirement contributions,’ said Brian Leinhauser, an employment attorney based in West Chester [Pa.]. ‘If anything that’s been promised contractually to an employee isn’t delivered, it can be considered to be some form of theft.’”
“Not all employers are bad actors. Some inadvertently make mistakes that can result in the underpayment of wages. In order to stay out of trouble, what can a small business owner do to make sure they’re in compliance? For Leinhauser, it first starts with documentation.”
“‘Under the Fair Labor Standards Act, an employer has to maintain records of their hourly employees’ time, which mean timesheets or time cards or online time reporting,’ he said. ‘If just one disgruntled employee thinks they’re owed overtime or other wages and they file a claim with either the state or Federal Department of Labor you’re going to be asked to provide documentation. Without it, you have little defense.’”
“‘Have an attorney come in and look at your job descriptions and look at how your employees are working and determine their titles and responsibilities,’ he said. ‘Some are exempt from the overtime rules, for example, but many others are not.’” READ MORE
ECOMMERCE
You are no longer allowed to shop here! “Last summer, Karen, a product manager in San Francisco, returned $180 worth of her $295.39 order from Urban Outfitters. The next time she clicked CHECKOUT on an order from the retailer, a few weeks later, it wouldn’t go through. Confused, she kept trying — until she got an email informing her that she was no longer allowed to order from the website, or any of its associated establishments, because of an ‘excessive return rate.’ She was surprised. She had been steadily returning items to Urban Outfitters about once a month since high school without a problem.”
“As it turns out, there are a lot of people like Karen, online shoppers who return things almost as frequently as they place orders. And online retailers, many that built free returns into their business strategy, finally seem to be reaching their limit. Which makes sense: In 2023 alone, people returned $743 billion worth of merchandise.”
“Now sites like ASOS and SSENSE are handing out lifetime shopping bans to longtime shoppers they determine have returned too much too often. What constitutes ‘too much too often’ can be vague. None of the brands mentioned in this story — all of which either have a free-return policy or charge a small fee — specify an exact dollar amount or frequency that adds up to a lifetime-ban-worthy violation.”
“Nadine Hanson, a server, had long taken advantage of Sephora’s generous return policy. The highly lenient policy afforded her the ability to sample so many products it had begun to feel genuinely stressful keeping up — she’d buy a product once a week, use it once or twice, then rush to send it back. Then she received a rare warning instead of an outright ban.”
“Now, she’s forced to be certain that she actually wants something, she says. ‘I’m buying things and then keeping them, and if the product isn’t perfect, I just handle that.’” READ MORE
ARTIFICIAL INTELLIGENCE
Elad Gil says entrepreneurs will make this the year of the AI app: “Over the past 16 years Gil has been one of Silicon Valley's most prolific solo investors, having been an early backer of Airbnb, Stripe, and Coinbase among many others. He helped start Google's mobile team in the early 2000s, served as a vice president at Twitter, and co-founded two companies, Mixer Labs and Color. Gil sees 2024 as the year that the ‘AI app layer’ will start to crystallize, bringing the power of rapidly advancing foundation models to the masses.”
“‘We're just hitting the wave now’ Gil told Business Insider, referring to the nascent entrepreneurs who, wowed by ChatGPT, spent six to nine months working up the gumption to quit their jobs and are just now starting AI companies.” READ MORE
AI is already a huge driver of wealth: “Nvidia co-founder Jensen Huang’s wealth has surged as a blistering rally in AI-related stocks pushed the chipmaker’s market value above Amazon.com’s for the first time. The same rally has minted another billionaire in Huang’s own family: his distant cousin Lisa Su, chief executive officer of Nvidia competitor Advanced Micro Devices, who’s worth $1.2 billion after the stock doubled over the past year. Two chipmaker billionaires in one family illustrate the scope of the artificial-intelligence craze, which has come to dominate the stock market and accounts for most of the wealth gained by the world’s richest people this year.”
“Among the 500 wealthiest individuals, 30 attribute at least some of their fortune to companies that are tracked by the Bloomberg Global Artificial Intelligence Index. Those holdings have boosted their net worth by a combined $124 billion so far this year, accounting for 96 percent of the total wealth gained on the Bloomberg Billionaires Index.”
“The biggest winners include Huang and Mark Zuckerberg, whose Meta Platforms is the second-best performer on the S&P 500 Index after Nvidia for the second year in a row. Steve Ballmer has ridden the wave of optimism that accompanied Microsoft’s partnership with OpenAI, while Michael Dell has seen his fortune surge thanks in part to AI initiatives at Dell Technologies and Broadcom. READ MORE
AI is also driving San Francisco’s comeback: “California’s commercial capital has no serious rival in generative artificial intelligence, a breakthrough technology that has caused a bull market in American stocks, and which many hope will power a global productivity surge. Almost all big AI startups have their headquarters in the Bay Area, which includes San Francisco and Silicon Valley. OpenAI is there, of course; so are Anthropic, Databricks, and Scale AI. Tech giants, including Meta and Microsoft, are also spending heavily on AI in the city. According to Brookings Metro, a think-tank, last year San Francisco accounted for close to a tenth of generative-AI job postings in America, more than anywhere else. New York, with four times as many residents, was second.”
“This has changed the mood of San Francisco. When you live in the city, you can feel AI in the air. Drive to the airport and every second billboard tells you the various ways in which your business can improve by adopting AI.”
“Despite headlines about an exodus of the rich, San Francisco’s tech elites mostly weathered the storm—its population decline was, in fact, mostly driven by the exit of poorer folk. As a result, inhabitants are now better paid and more educated than before covid. According to official data, San Franciscans’ average personal income per year is more than twice the American average. Even as poor residents have left, income inequality has soared.”
“In desirable neighborhoods competition for rental properties is fierce, as the city’s population once again grows. The arrival of lots of well-paid tech types has boosted house prices. Although they fell by more than 12 percent from their pandemic highs, they have risen since the start of 2023. The city has fewer restaurants than in 2019, but about the same number with two or three Michelin stars. North of the city, in wine country, there is no shortage of new, expensive hotels at which venture capitalists and founders can relax.” READ MORE
AI is even going after bed bugs: “Just months before the city was set to host the Olympics, scheduled for this summer, the French capital garnered headlines for an invasion of pests. ‘Paris is crawling with bed bugs,’ reads one from CBS News. It was bad news for hotels, with hotel owners shelling out thousands for exterminators. But for Robert Fryers, co-founder and CEO of Spotta, it was an opportunity. Fryers, an engineer, started Cambridge, U.K.-based Spotta with his co-founder in 2017 to develop technology capable of identifying bed bugs on hotel mattresses. Since then, the hotel industry has responded positively, with hotels in Europe — and increasingly the U.S. — installing Spotta devices.”
“The damage of bed bugs goes well beyond exterminator fees. A 2015 University of Kentucky study found that a single online review that mentions bed bugs can lower the value of a hotel’s room by between $23 and $38 per night. That impact can last months. ‘The real pain comes from the reputational damage, the loss of customer loyalty,’ Fryers said.”
“The technology itself, he said, is unobtrusive to guests. Spotta’s device is the size of a pack of cards, which is tucked under a hotel mattress. The device features an image sensor, which uses AI to identify any bugs it detects. If it finds a bed bug, hotel management will get an email with a photo, plus which room it was detected in.” READ MORE
MEDIA
Big media companies are fighting for survival, and their demise will likely affect all of us in ways we can only imagine: “‘Publishers, brace yourselves—it’s going to be a wild ride,’ Matthew Goldstein, a media consultant, wrote in a January newsletter. ‘I see a potential extinction-level event in the future.’ Some of the forces cited by Goldstein were already well known: consumers are burned out by the news, and social-media sites have moved away from promoting news articles. But Goldstein also pointed to Google’s rollout of A.I.-integrated search, which answers user queries within the Google interface, rather than referring them to outside Web sites, as a major factor in this coming extinction.”
“Brands with strong home-page traffic will likely be less affected, Goldstein wrote—places like Yahoo, the Wall Street Journal, the New York Times, the Daily Mail, CNN, the Washington Post, and Fox News. But Web sites that aren’t as frequently typed into browsers need to ‘contemplate drastic measures.’”
“What will emerge in the wake of mass extinction, Brian Morrissey, another media analyst, recently wrote in his newsletter, ‘The Rebooting,’ is ‘a different industry, leaner and diminished, often serving as a front operation to other businesses,’ such as events, e-commerce, and sponsored content. In fact, he told me, what we are witnessing is nothing less than the end of the mass-media era.”
“The Times launched its Web site in 1996, promising ‘to extend the newspaper’s reach and create new editorial and business opportunities in electronic media.’ As part of that effort, a ‘thoughtful, unbiased filter’—with ‘a powerful but user-friendly search function’—would amplify its classified offerings nationwide. By then, Craigslist had begun its takeover of newspapers’ classifieds revenue”
“Craigslist’s founder, Craig Newmark, now funds a journalism school that recently announced its intention to go tuition-free, a move reminiscent of the explosives manufacturer Alfred Nobel’s impulse to fund a peace prize.” READ MORE
HEALTH INSURANCE
Can employers afford to cover the new weight-loss drugs? “Since 2015, North Carolina's state health plan for government employees covered certain weight-loss drugs — until costs soared. About three years ago, the cost to the insurance plan for the GLP-1 class of weight-loss drugs that includes Wegovy and Ozempic, among others, amounted to $3 million per month. By 2023, that cost had soared to $14 million per month — and it was projected to hit $600 million annually within the next five years. The plan’s board of trustees voted in October last year for a moratorium on coverage of GLP-1 weight-loss drugs beginning in 2024.”
“Employers are under particular strain when it comes to the cost of employee health-care benefits, with the average cost set to increase by 8.5 percent to about $15,000 per employee in 2024, according to global professional-services firm Aon. That’s nearly double the 4.5 percent increase from 2022 to 2023.”
“Coverage of the weight-loss drugs is a huge priority for workers. A survey of 1,300 Americans by diabetes-care firm 9amHealth found that when ranking their desired job benefits in order of importance, coverage for weight-loss drugs such as Ozempic and Wegovy ranked behind only employee-sponsored health care, flexible working hours, company equity and matching 401(k) contributions.”
“About 30 percent of the survey respondents said they were employed somewhere that covered the weight-loss drugs, but for those who said they were not, 21 percent said they would be very likely or likely to change jobs if they could access coverage for the drugs.” READ MORE
First, climate change made property insurance more expensive and harder to get: “Health insurance could be next, as research shows extreme heat and wildfires are putting more people in the hospital. Californians exposed to both extreme heat and wildfire smoke on the same day were at greater risk of being hospitalized for cardiorespiratory illnesses, according to a study published earlier this month by researchers at the University of California San Diego. In particular, the study linked higher temperatures to heart attacks and strokes and found that wildfire air pollution increased the risk of cancer and lung problems.”
“After the hottest year on record and increasingly extreme weather events, health insurers are battling to figure out how climate change is going to affect their business. The companies are building new models to reassess premiums, estimate risk, and meet incoming climate reporting standards as coverage costs rise in a warming world.” READ MORE
THE 21 HATS PODCAST
‘I Had to Fire the Guy:’ This week, Paul Downs, Jay Goltz, and Sarah Segal talk about sexual harassment and where you draw the line with employees. Is it sexual harassment for one employee to ask another for a date? Is it sexual harassment to ask twice? Does it make sense to have a policy of zero tolerance? Or is it better to leave room for discretion and judgment? The conversation was sparked by a recent situation Jay experienced with an employee who had been with the company for almost three decades, having started at the age of 17. “It was a very sad thing,” Jay tells us.
Plus: Sarah Segal asks whether it’s better to build her business on a bunch of small clients or a smaller number of large clients. And is being CEO a health risk? We begin the episode by talking about an eye-catching story the Wall Street Journal recently published noting that an increasing number of CEOs have been dying on the job, presumably because of the heightened levels of stress.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren