Leverage Real Estate to Grow Business

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The space your business operates from represents an investment to bring a product or service to market to generate a return on investments through business profits. Founders and leaders of growing companies often begin looking for space alternatives as the business outgrows its present space. Merely looking for space within a budget leaves the business vulnerable to taking ill-fitted space you may regret using and enduring. How to change this efficiently and effectively??? This post can help guide a decision about leasing, purchasing, or committing to a long-term sale-leaseback; focus on the section most relevant to the needs of your business.

View real estate as a fixed, yet flexible tool to operate your business. It must be flexible in use and marketable to vacate, relet, or sell when its no longer useful for your business. (Vacating an attractive space that’s no longer useful for your business (e.g. location in building/on floor, wiring, finishes, cosmetics) could be attractive to your landlord.)

In-lieu of “finding your next space”, “match your next space, investment, or land acquisition to the purpose of your endeavor”. You’ll get an entirely different result; a space used at terms favorable to your business.

Space size and price do not offer enough of a means to compare options to choose from. A savvy Tenant Rep will show you the qualitative and quantitative modeling of how to look at your space options to decide which deal meets your operating needs.

Steering Committee

Corp AdvisorCreate a steering committee to manage the search and secure process from start to finish. They are tasked to establish/shape the criteria for facilities, location and economic planning via a bottom-up approach for the CXO team to craft and fine tune. Steering committee members include the COO, business unit managers, a line manager, exceptional team leaders, your Tenant Rep; other key company members can be copied on minutes of steering committee meetings. Ingredients for space criteria include:

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These physical and financial plans keeps space needs known, predictable and costs low. Space criteria can be fine tuned with the help of a space planner from an architectural firm versed with permitting, and a relocation project manager. Search/secure planning is as important as preparing the space for use. The physical and financial aspects of each space considered can be plugged into real estate transaction modeling applications (spreadsheets from MS-Excel or affordable modeling software such as PlanEASe or ProCalc). A comparative quantitative analysis helps to reveal your cost of occupancy. The final transaction model will serve as a guide to negotiate the business terms for the space. The end goal is keeping space costs known, predictable and low while adding functional operating value to your business.

Comp AnalComparing lease, buy, or sale-leaseback options shows your cash outlays, cost of capital, productivity of staff from space design and location, and shows tax impact. Your Tenant Rep should help you identify alternatives if no space is found, or deal terms negotiated, to match your operating needs. BREG’s review of options with you include how we’ll respond if the seller (and other players) cannot meet your transaction or development needs.

Compare benefits of leasing vs. buying, and sale-leaseback. All rent costs are operating expenses; subletting must follow the legal subsection outlined in your lease. As a lease is the legal right to use a space for rent, TI spent by the Tenant to last the duration of the lease could qualify for depreciation in financial statements. Owned real estate, plus capital improvement expenditures are subject to depreciation. Paid mortgage interest and property taxes are deductible on business income tax returns; interest is higher in the early years of the loan. A sale-leaseback taps the equity and capital appreciation of your owned property, that may need some capital improvements to continue operations. Delegate your CFO to discuss these issues in detail with the real estate specialist of your CPA provider.

Lease

Cmcl LeaseYou can choose to exercise an option to renew, expand within your building, move within your building at new terms, or relocate to another property. Give your business 24 months lead time from 3500sf and up of office space to conduct this search/secure project at a leisurely pace, relative to market conditions; construction (from drawings to move-in) will take six months to complete. Each space considered should be presented in column format, side-by-side, to facilitate a decision of accept, fine tune terms, or drop the space from consideration. This format enables preparing fighting alternatives to secure the deal you need. Overall, this method of comparison uncovers fine points of options to root out the right option for you. Key business term of leasing include rent security, billing of utilities, building rules on HVAC after-hours, building access before/after business hours, expansion or contraction rights, sublets/assigns, terms of early exit. Signing the term sheet of the deal testifies that the choice made from the search process is renew, expand or contract space, relocate within the building, relocate; the outcome is planned and predictible.

Sale-Leaseback

If you own your property and are considering to unlock its cash value from a sale-leaseback, a financial model will show the discounted market value of the property, rent, operating expenses, and how investor’s holding period may affect your rent responsibilities. Tax impact influences your consideration to complete a sale-leaseback transaction (capital gains, rent). An investor specializing in sale-leasebacks can facilitate the process; your Tenant Rep or investment sale broker can connect you and negotiate the transaction terms. Sale-leaseback is an attractive way to remain in your current location long-term, get capital improvements made to the property by an experienced real estate investor, and re-capitalize your business with the strength of your company’s credit and net proceeds of sale.

Buy

real-estate-deedPurchasing calls for placing available cash into acquisition costs, construction costs (soft, hard, wiring), property management, mortgage and property taxes; all other costs being equal if leasing. Considering to buy a property requires quantitative and qualitative analysis. Analysis performed by your Tenant Rep or investment sale broker shows how your investment will perform as compared to placing the money in other investments and how the real estate adds value to the business. Owning a larger building with a tenant(s) could limit fixed costs, allowing for on-site space expansion when prudent. Your investment sale broker prepares a financial model about how the net profit from Tenant(s) could be invested to enhance investment yield. The financial model shows how your cash will work for you, plus net proceeds of sale, projected over a holding period. Factors to consider include physical space, price, acquisition costs, holding costs / benefits, tax effect, return on investment. The financial and physical outcome of acquiring commercial property requires some degree of predictability to focus on operating and improving the performance of your business. BREG shows how a mortgage, tax, utility and economic development benefits will help lower your acquisition, development and operating costs of the property. Each scenario is reviewed to the extent you need to create options to focus on. The report is discussed in layman’s terms to make a choice, giving a predictable outcome.

return on investmentFive (5) Key Factors affect a property purchase:

  1. Physical building and location. What kind of building and layout does your business need? Where should it be located?
  2. Development. Does the building need retrofitting, rehab or is land development your best option?
  3. Financing (including IDA financing). Your credit status will dictate the lending terms you can secure.
  4. Economic Development benefits from utilities, job creation, construction. Location of the business, employees relocated, new hires and how you power/light your property will all help identify the economic development benefits available to you to lower your cost of occupancy.
  5. Tax benefits (mortgage interest, depreciation, property tax abatements, effective tax rate). Property tax abatements, plus tax deductions for interest will be factored into the transaction to show its financial effects on your cost of occupancy.

If a change of the real estate for your business is on your horizon of projects, I encourage you to contact me to talk it out. Test-fits of space and transaction modeling have worked well for BREG clients since the late 1990’s. Please click “Request A Consultation” link in the upper right of the screen. Enter “Real Estate on My Horizon” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours.  Thanks for reading and listening.###

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