1. How far in advance should you start looking for space?
In a balanced or tenant/buyer’s market-
To Lease – 4 months in advance of your current lease expiration – 1st month to educate yourself on the market. 2nd month to identify and narrow down your choices. 3rd month to get the lease negotiated and signed. 4th month to overlap your last month of existing lease and allow a smooth orderly transition from your old space to the new space. You can adjust the lead time if you have complications such as an equipment intensive manufacturing company requiring HVAC and electrical modifications – or other tenant improvements which require permitting and construction
To Purchase – 6 months in advance of lease expiration- 1st month- to educate yourself on market value. 2nd & 3rd month to scour the market and identify several options – 4th month to negotiate and get under contract- 5th & 6th months to do your due diligence, arrange and finalize financing – and close on the property. If you are hard to satisfy you may want to add another month or even two. You can adjust the lead time if your requirements are not typical of conventional construction and need unique or special features difficult to find (ie. no interior columns, 35′ ceilings).
2. Identify the zoning you need and define your geographic boundaries.
Each municipality has a zoning ordinance which specifies which businesses can operate in differently zoned areas. You can go to the link shown at the end of this article to determine which zoning you need. MuniCode provides online ordinance presence for numerous municipalities. It is critical that you first identify where your business can legally operate and then limit your search those areas. If you don’t do this it will be a very expensive and time consuming mistake. I can’t emphasize this enough.
You need to identify where you want to locate. Over my professional career as an industrial specialist I have found that given all things equal, the final space location is strongly influenced by the proximity to the owner of the company’s personal residence. Other factors to consider are: distance to major interstate highways, airports, shipping ports, rail service, labor force, public transportation and markets served. A good idea is to determine the furthest you will go in all directions. This helps make the search workable.
3. Determine whether you need loading docks
If you are a distributor you need loading docks. You may also need street level doors. If you are a manufacturer or service provider, you may not need loading docks. There are several types of loading docks. Truck wells, recessed, platforms, 30″ docks and 48″ docks. Make sure you select a building with the correct height docks, quantity and configuration. Don’t forget the size (dimensions) of the overhead doors. It won’t do you any good to have a 14′ high truck that needs to drive into the building and only 12′ high doors. You may also need a ramp. Consider how much time not having a needed feature will cost you in a time and motion study.
4. Determine the ceiling height you need
If you are a distributor, the higher the ceiling height the better. Determine whether you stack 2, 3 or more pallets high. Typically you need 24′ for stacking 3 pallets high. This can vary on the size and weight of your products. Be sure to take into account the clear height not just the overall height. Sprinkler systems, roof structural members and HVAC frequently reduce the clear height. If you are a manufacturer or service provider you may want lower ceilings; especially if you are going to air condition the entire space. The fewer cubic feet you are cooling, the lower the electric bill. If you need a lot of lighting or electrical drops a lower ceiling is also beneficial.
5. Determine amount of office and warehouse space you need
Allow for future growth. Having to move again or get space close by results in inefficiency and higher costs in the long run. Lease/buy 10-30% more space than you need and rent it out until you need it. Think long term. Plan for success. Make sure the building you go into has enough parking. Occasionally office space will be built without permits and the result can be a shortage of parking. This will set you up for issues with the city in trying to get an occupational license as well as trouble with neighbors. Typically, you need 1 parking space for every 200 square feet of office space and 1 parking space for every 800 square feet of warehouse area. Confirm this with your building codes and architect.
6. Mechanical – HVAC – fire sprinklers issues -rail access
This is where planning pays off big time. Modifying the building before you move in, is a lot easier than doing it while you occupy the space. Mechanical and electrical engineers should be consulted when evaluating potential buildings.
7. Define your budget
Once you get a handle on market values and how much cash you have, you can work backwards and figure out how much space you can lease/buy.
Purchase example: Assuming the following: You have $1,000,000 cash and buildings sell for +/- $70 per square foot. Conventional financing requires a 20-25% down payment – $1,000,000 is 25% of $4,000,000. Dividing $4,000,000 by $70 per square foot results in 57,000 square foot building. The lender will typically require that your cash flow be 130% of your debt service. Bear in mind that you will also have taxes, insurance and maintenance to pay for as well. There are tax benefits to owning and appreciation can be an extra bonus. Real estate values can move up and down with business cycles and entrance and exit timing strategies are crucial in maintaining and maximizing value.
Lease example: this is largely determined by your cash flow. Rents can be quoted in various ways. Industrial lease rates can be gross, modified gross, net or modified net. The difference is how much of the variable costs (taxes, insurance and maintenance) the tenant has exposure to. Other terms of the leases, such as annual escalations (can be a fixed or variable % or be based on a CPI Consumer Price Index), responsibility for utilities cost, insurance and insurance deductibles are examples of other expenses that should be considered.
8. Determine parking and truck court needs
There are two things to take into account for parking- one is the number of employees you anticipate having immediately and in the future, at the new location. The second consideration is what building codes require.
How many and what type of truck deliveries do you get a day, a week a month? Make sure the property you choose can handle the trucking volume without interruption from other tenants or property limitations.
9. Determine whether you need outside storage & how much
If you do need outside storage, make sure you choose a property with the correct zoning designation. What you store outside plays a big part in how much land you need and where it is allowed. Parking cars is quite different than storing building supplies or hazardous materials You may need a 6′ high visual barrier, drainage, paving, landscaping or a parking lot which is lit to certain specifications. All of this can significantly add to the expense of relocating.
Allow enough land to accommodate additional growth. Plan for success.
10. Using a broker or find the space my self?
How much is your time worth? Are you better off running your company and letting a professional handle it for you? Can you do both, well? Do you have experience in real estate negotiations? Frequently I get calls from people looking at for example, a 10,000 sf building and need 30,000 square feet or 1,000 square feet. After driving around and making call after call only to find out the building is for lease and not sale, wrong size, zoned incorrectly, partially occupied or not available for 6 months, gets exasperating.
The seller/landlord are typically the ones that pay the brokers. Be sure to discuss representation at the beginning of the relationship. Realtors have a legal obligation to disclose and treat the public fairly.