Cap Rates vs Capos
How to do $200 mixes in your home studio while complaining about Music Row changing hands...
Have you ever attended a funeral that lasted 10 years and everyday all you did was talk about how dead the corpse looks.?
Dearly Beloved
Last month another well-known and well-loved recording studio announced it is closing its doors and selling off its real estate to a commercial developer.
Waypoint Residential has purchased the property housing OmniSound Studios. The plan is to build a 22-story high rise with 143 one-bedroom units, 77 two-bedroom units, and 14,000 square feet of commercial build-out.
We’ve heard this song on repeat throughout the Music City over the past decade. Luckily some of the bigger studios like the historic RCA Studio A, Sound Emporium, and Oceanway have been spared the wrecking ball, even if survival means being absorbed into the for-profit education business model.
Other studios like Blackbird and Darkhorse continue to roll by brute force and willpower, and by joining the for-profit educators in creating recording school programs. These for-profit programs teach folks how to record in recording studios should they be able to find one someday.
Other studios like Fireside, The entire UA Tower, Sound Shop, Studio 19, Vibe 56, Javelina, Battery, 18 & Grand, Masterfonics Tracking Room, MasterMix Mastering, and dozens of others have been reduced to rubble. The land they occupied is now worth more than the businesses housed within their soundproofed walls. The dirt they occupied has since been re-planted with condos, office parks, apartments, retail shops, or other profitable ventures.
They Cry Outrage
When a studio like Omni announces its demise there’s an influx of keyboard warriors who take to the interwebs to decry “what happened to Music Row?”, or “this is outrageous, save the studios!”, or “Developers are removing all of the Music from Music City!”, or “this is all about greed and money!”. [actual quotes - there are tons of them]
The funny thing is, much of this typing is coming from within HOME STUDIOS!
One home studio warrior lamented; “At the end of the day it's all about money & the bottom line. Very sad.” Very sad??? How in the hell does this guy manage his household budget if it’s not by money and the bottom line?
As a high rise looks to replace Omni, one warrior laments; “The bottom line is greed.” What? The bottom line is the bottom line. Greed has nothing to with it. I’d love to go new car car shopping with this dude.
Another wrote; “I find NOTHING good about what's happening in Nashville...” My gosh. No words to say here, other than to ask how many commercial studio days this fella booked in the last 5 years?
Greed You Say?
Truthfully, what makes one decide to open a home studio? The reasons are greed and money and the bottom line. It’s that simple. It may be hard to say out loud, but these are the reasons.
I opened a home studio because I was being offered between $500 - $1,000 to mix a song during the early-mid 2000’s. A decent studio to accomplish this task would’ve cost me $500 - $1,000/day. If I mixed 2 songs per day half my income would go to overhead.
Given the relative inexpensive prospect of buying a computer, a Pro Tools license, and some decent speakers I decided to to forego the route of booking commercial studios for my projects and do the work in my home studio instead. Why? Greed and money and the bottom line.
One major point - you will never see me rattling on about studios closing their doors and their real estate being capitalized. Hell, I’m one of the reasons it’s happening!
How to Run a Business
In terms of real estate, the owners of OmniSound are going to do ok. From the Nashville Post:
Sounds Perfect LLC owns the property, having acquired it for $700,000 in 2007, according to Metro records. The LLC is affiliated with Texas-based Sue Caperton and Steve Caperton, who also own the OmniSound Studios business, according to state documents.
It looks like they listed (sold) the property for $4.25M this year [Nashville Post]. That’s a profit of around $3.5M and an IRR (Internal Rate of Return) of around 11% annualized [gross] over their 15 years of ownership. Not bad - before you start to consider running a studio on that piece of real estate. That’s where things go sideways.
Remember the old adage; “How do you make a million dollars in the music business? You start with 2 million dollars!” Let’s take a look.
How to Ruin a Business
Commercial studios are fraught with overhead - real estate taxes, business licenses, business taxes, sales & use taxes, payroll & payroll taxes, building maintenance, building improvements, building repair costs, lot maintenance & upkeep, equipment upkeep, equipment upgrades, insurance for the business, insurance on the building, insurance for the things inside the building, HVAC costs & maintenance, energy costs, water bills, a cleaning service and cleaning supplies, a cable tv package, high speed internet, telephones, furniture, a good copy machine, paper, pens, pencils, Culligan water, coffee & a robust coffee machine, food & snacks, toiletries, a sign out front, some advertising, and you will need to keep the place stocked with booze, whores, and cocaine. (oh wait this no longer 1989, sorry)
For the gentlemen above talking about the bottom line, yeah it’s down there… down there somewhere… Remember too, all of these expenses keep going up. Studio rates, meanwhile are running the opposite direction.
When OmniSound Studios was first conceptualized, artists were making money 4 and 5 bucks at a time selling physical product. Now they make their money micro-cents at a time praying for Spotify streams. Recording a project these days is basically a loss-leader against touring, live performances, and hopefully some tv, movie, or ad placements. Remember the guy in the casket?
With obvious technology advances that allow folks to make a record anywhere, we’ve seen a colossal reduction in the need for studios. If you were awake for the first 3 minutes of your ECON101 class you’d know this results in a colossal reduction in studio rates.
Cap Rate
If you’re looking at real estate from an investment perspective you’d want to see the cap rate on this investment. It’s one thing to buy a property for one price and sell it for another, but what kind of income does your investment generate along the way?
Your capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. [Investopedia] A cap rate between 5-10% is considered to be a target, and 7% would considered a respectable number.
With the help of some old music biz friends we looked at a potential cap rate of Omni’s studio business…
Cap Rate vs Capos
Our estimates considered the gross income of the studio business offset by operating expenses, tabulated against the value of the real estate (Net Operating Income/Property Value). We came up with a cap rate of around 2.5%. Maybe less. Horrible!
Now, keyboard warriors, I ask you. What looks better against your “bottom line”? enjoying a 2.5% cap rate or selling the property to pocket an 11% annualized return over the past 15 years and then dropping a few million into an allocation of stocks and bonds that will probably return 8% per year in perpetuity?
Or possibly taking the money from the sale and paying cash for a property paying a cap rate triple what a recording studio was generating, given all parameters equal whilst insulating yourself from a dying business model?
Is this greed? Or is this the bottom line? Or, more likely, smart investing? Money goes where it’s best rewarded…
What’d You Think was Going to Happen?
To the guys crying about Nashville trading another studio for another high rise - If you wanted these studios to stay open, you should’ve booked them more. If you woke up today wanting the studio scene on Music Row to resemble 2003, you should’ve spent more time and more money up there.
When the idea of calling Sweetwater to buy some microphones and speakers for your home studio popped into your head, you should’ve called Omni instead. They had everything you needed wired up, powered on, and ready to go.
When you got offered $200 to mix a song you should’ve explained to your potential client that the mix studio at Omni will cost at least three times that and your mix rate is another few hundy on top. You should’ve explained you’ll need at least $1,000 to make it happen.
Oh… I forgot… the bottom line… You needed that $200, so you found way to do $200 mixes in your home studio so you didn't have to spend any money on Music Row…
Yet you complain about greed changing the landscape of Music City? Got it pal...
Get. Bent.
The Bottom Line
Here it is. The music business has left the time where Omni, The Tracking Room, or SoundShop came into fruition. Then, they were viable businesses. Today they are bodies in caskets.
A viable business in Nashville today? A 22-story high rise with 143 one-bedroom units, 77 two-bedroom units, and 14,000 square feet of commercial build-out.
No studio, Omni included, has a moral obligation to you, to Nashville, or to music history that would obligate its owners keeping it operational in the face of better financial offers.
High rise buildings do not represent greed. They are historic signs of wealth, cultural ambition, and the development of a city’s available space. If you don’t like them, you could consider moving to Memphis - when was the last time you saw a crane in Memphis building a high-rise? It’s one of America’s slowest growing cities.
Alternatively, cash in! Try researching some REITs where you can invest the money you have coming off your bottom line into profitable ventures like commercial real estate. Oh, all your profit is tied up investing in historic recording studios for the nice returns? Bless your heart.
Now… when Sweetwater starts running the “going out of business” sale and Chuck Surack has some nice moves going while spinning a “LIQUIDATION” signboard out front - start worrying.
Until then, stay off the keyboard when the next major studio is supplanted with a more profitable investment. You haven’t worked there in half a decade anyway…
Cheers - and thanks for reading!