Management Economics

1. Overview

Management Options

Financial Context (From Prior Analysis)

Key Finding: At 85% occupancy with recommended debt service and reserves, only ~$8,000/year remains for management costs and owner compensation.

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2. Scenario 1: Owner-Operated (Years 1-3)

Time Commitment

Ramp-Up Phase (Months 1-9):

Stabilized Phase (Month 10+):

Financial Model - Owner-Operated

Year 1:

Year 1 cash deficit must be covered by working capital reserve. No owner draw possible.

Year 2:

Year 3:

Owner Effective Hourly Rate

Assessment: Low effective rate reflects:

1. Debt service burden (~65% of gross profit)
2. Capital reserve requirements
3. Business building phase - equity value not captured in hourly rate

Benefits of Owner-Operated Model

Risks of Owner-Operated Model

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3. Scenario 2: Part-Time Manager (Year 2+)

Position Structure

Part-Time Facility Manager:

• Hours: 20 hours/week
• Hourly rate: $18-22/hour
• Responsibilities: Day-to-day operations, tenant communication, showings
• Owner role: Strategic decisions, financial management, 5 hrs/week oversight

Cost Structure

Using mid-range: $22,807/year ($1,901/month)

Financial Model - Part-Time Manager

Year 2 with Part-Time Manager:

Finding: Part-time manager is NOT viable at 85% occupancy in Year 2. Creates $15K annual deficit.

Break-Even Occupancy with Part-Time Manager

Additional revenue needed: $22,807/year = $1,901/month Revenue per occupied suite: $1,258/month Additional suites needed: 1.5 suites Current occupied at 85%: 15.3 suites Required occupancy: (15.3 + 1.5) / 18 = 93.3%

Year 3+ Viability

Finding: Part-time manager becomes viable only at 93%+ occupancy.

Decision Framework - Part-Time Manager

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4. Scenario 3: Full-Time Manager (Year 3+)

Position Structure

Full-Time Facility Manager:

• Hours: 40 hours/week
• Salary: $45,000-$55,000 base
• Responsibilities: Full operations, leasing, tenant management, basic bookkeeping
• Owner role: Monthly review, strategic decisions only (2-4 hrs/month)

Cost Structure

Using mid-range: $59,325/year ($4,944/month)

Financial Model - Full-Time Manager

Year 3 with Full-Time Manager:

Finding: Full-time manager is NOT viable with current facility economics. Creates $50K annual deficit.

Break-Even Analysis - Full-Time Manager

Additional revenue needed: $59,325/year beyond owner-operated model Current gross profit at 85%: $58,476 Required gross profit: ~$118,000/year Implied revenue (at 24% margin): ~$492,000/year Current revenue at 85%: $235,684

Gap: $256,000 in additional revenue = 110% revenue increase

Viability Scenarios

Finding: Full-time manager requires multi-location scale (2+ facilities) to be economically viable.

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5. Scenario Comparison

Side-by-Side Summary

Cost Comparison Visualization

Annual Management Cost by Scenario:

Owner-Operated:  [                                        ] $0
Part-Time Mgr:   [████████████████████████                ] $22,807
Full-Time Mgr:   [████████████████████████████████████████████████████████████] $59,325

Available Cash (Year 2, 85% occupancy):

Gross Profit:    [████████████████████████████████████████████████████████████] $56,812
After DS:        [████████████████████████                ] $19,828
After Reserve:   [███████░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░░] $7,828
After PT Mgr:    [XXXXXXXXXXXXXXXXXXXXXXXXXXXXX           ] ($14,979)
After FT Mgr:    [XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX] ($51,497)

Impact on Break-Even Occupancy

Key Finding: Each management tier significantly increases break-even occupancy, reducing margin of safety.

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6. Decision Framework

When to Hire Part-Time Manager

Consider when ALL of these are true:

• Occupancy sustained at 90%+ for 6+ months
• Turnover rate > 25% (heavy leasing burden)
• Owner has alternative income opportunity > $45/hr equivalent
• Owner experiencing burnout
• Planning second location within 12 months

Financial threshold: $22,807/year margin above owner-operated scenario = 93%+ occupancy

When to Hire Full-Time Manager

Consider when:

• Operating 2+ facilities
• Combined gross profit > $120,000/year
• Owner wants fully passive income
• Professional management needed for growth/complexity

Not viable for single facility at any achievable occupancy level.

Recommended Management Evolution

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7. Owner Compensation Analysis

Total Owner Return (Not Just Draw)

Year 1-3 Value Creation:

Adjusted Owner Rate:

Finding: When accounting for equity building (debt paydown + reserves), owner effective rate is much higher than cash draw alone.

Comparison to Hired Manager

Owner-Operated Value: $73.85/hr (Year 3 all-in) Part-Time Manager Cost: $20/hr Savings by Self-Managing: ~$54/hr

But owner's alternative opportunity cost matters:

• If owner can earn >$54/hr elsewhere, hiring makes sense
• If owner earns <$54/hr elsewhere, self-manage is optimal

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8. Sensitivity Analysis

Impact of Higher Occupancy on Management Options

Impact of Lower Debt Service

If loan reduced from $228K to $168K:

Finding: Even with minimal debt, part-time manager still creates deficit at 85% occupancy.

Impact of Higher Rents

If blended rate increases from $315/week to $345/week (+10%):

Finding: 10% rent increase makes part-time manager viable even at 85% occupancy.

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9. SBA Presentation Summary

Management Structure Plan

Luxa Salon Suites Management Strategy:

Phase 1: Owner-Operated (Years 1-3)

• Owner commitment: 10-15 hours/week at stabilization
• No management salary expense
• Maximum cash retention for debt service and reserves
• Primary focus: tenant relationships, quality control, business learning

Phase 2: Assess Transition (Year 3+)

• Evaluate based on: occupancy levels, owner time value, expansion plans
• Part-time manager viable only at 93%+ sustained occupancy
• Full-time manager requires multi-location scale

Financial Summary by Scenario

Risk Mitigation

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10. Key Findings & Recommendations

Critical Findings

1. Owner-operated is the only viable model for Years 1-3 given debt service obligations and capital reserve requirements.

2. Part-time manager requires 93%+ occupancy to be break-even - significantly above the 85% base case target.

3. Full-time manager is not viable for single facility at any achievable occupancy level. Requires 2+ facilities.

4. Owner effective rate is understated when only looking at cash draw. Including equity building (debt paydown + reserves), owner earns $60-75/hour equivalent in Years 2-3.

5. 10% rent premium would unlock part-time manager option at 85% occupancy. Premium positioning and quality differentiation enable this.

Recommendations

Owner Decision Matrix

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Management Economics Analysis Complete Phase 8: Facility Financial Model - Plan 02 Task 3 Complete