There are myriad programs available to commercial and industrial real estate users that provide low cost capital and incentives for new investment. In addition to conventional financing, there are nontraditional sources of financing, tax deferral and tax mitigation strategies that can stretch your equity dollar.
Smart Business spoke with Bob Brehmer, CCIM, SIOR, principal at NAI Daus, about financial aid programs that can benefit commercial and industrial real estate users.
What are port authority conduit financing and construction savings programs?
If you are considering an acquisition of property, new construction or redevelopment of an existing structure, you should visit your port authority. It can direct you to financing and other programs that may be of benefit. For instance, one of its programs provides for state and local sales tax exemptions on materials for new construction and expansion projects. This can offer considerable tax savings that can be used to fund equity or be reserved for other investments.
Your port authority can arrange financing at higher loan-to-value ratios and can accommodate other structures such as conventional loans, grants, capital leases and operating leases. Bond fund programs allow borrowers to access capital markets and secure long-term fixed interest rates.
There is an ability to integrate other sources of financing such as those available through state, city and county programs, and other conventional financing methods. Eligible business can be industrial or commercial as well as 501(c)(3) and governmental entities. Funds can be used to acquire and renovate existing buildings or for land acquisition and new construction. The programs have been used to fund student housing, manufacturing facilities and redevelopment projects.
What is PACE and what is it used for?
The acronym PACE stands for Property Assessed Clean Energy. It is a method to finance energy-efficient and renewable energy upgrades to buildings by using special assessments. Cities, villages and townships are authorized to participate with property owners who want to install energy efficient improvements and upgrades.
A special assessment district is formed to finance eligible projects with special tax assessments. The assessments are placed on the property owner’s tax bill and are collected over five or more years.
If you are considering a solar, solar-thermal, geothermal or other customer-generated energy project, this may be a program to consider.
What other programs would you recommend?
The EB-5 program, for example, which allows foreign nationals to receive a permanent U.S. green card by investing in new or troubled U.S. businesses and New Market Tax Credits, can be utilized to help fund new and redevelopment projects. These programs are complicated, but have been used in this area for various high profile projects. Fortunately, we have a number of excellent sources and service providers in the area to assist firms using these programs.
One of the more dynamic, but lesser known, programs is the U.S. Foreign Trade Zone Act (FTZ). Created by Congress in 1934, the program is used as an incentive to encourage companies to keep jobs and investments in the U.S. A FTZ removes certain costs and barriers that do not exist in foreign locations.
FTZs also create a designated area that is considered to be outside the stream of international commerce. This allows certain types of merchandise to be admitted to the FTZ without being subject to customs, duties or some excise taxes. The benefits are numerous, including but not limited to the deferral, reduction or elimination of duties. An FTZ also permits activities such as testing, assembly, relabeling, repackaging and storage of goods. Northeast Ohio has two: FTZ 40 in Cleveland and FTZ 181 located in Summit County.
Your next project may be financed by your traditional lender relationship. You should, however, investigate the nontraditional sources of capital and financing available to business. You may end up receiving more flexible terms while retaining more of your hard-won capital for other investments. ●
Insights Real Estate is brought to you by NAI Daus
A flight to quality during the recession saw businesses move to more modern warehouse and distribution facilities. In some cases, companies relinquished functionally obsolete buildings that have the potential to be modernized.
Bob Brehmer, CCIM, SIOR, principal at NAI Daus, says when businesses can’t find what they want in an existing facility, they’ll build. However, there’s a substantial cost difference between modernization and new construction.
“The lack of amenities in their current facilities or lack of suitable options on the market must be sufficient enough to warrant new construction,” he says.
Smart Business spoke with Brehmer about how businesses can take full advantage of real estate trends affecting warehouses and distribution centers.
What’s driving the changes with warehouses and distribution centers?
Facilities are becoming more efficient, leveraging speed enhancements and space optimization to reduce costs. Warehouses and distribution centers are maintaining their existing footprint but adding volume by building up — incorporating higher ceilings — and implementing cross docking, myriad material handling systems that reduce storage times and improve shipping efficiencies, and improved racking systems.
How is this affecting the physical building?
Businesses are implementing racking, conveying systems and automated case picking using robots, which has necessitated changes in the physical construct of warehouses and distribution centers. These optimizations are driving out the uncertainty of human costs to a more fixed-cost, predictable model.
Some warehouses also are incorporating high-efficiency lighting in the form of LEDs, which burn longer, saving money. These cost more upfront, but they’re being mass-produced as demand rises, so prices are dropping. Federal energy policies have incentivized companies to utilize these energy-saving bulbs through rebates.
In the same vein, better-insulated walls and improved dock seals are saving companies money on their energy bills.
It might cost more to construct or retrofit a hyper-efficient warehouse or distribution center, but operating and occupancy cost savings are tangible. If a company is handling millions of stock keeping units per year, it can result in major long-term savings.
What’s key to know in terms of location?
Businesses are building or buying warehouses and distribution centers nearer their customer base, primarily, as well as within a favorable distance to their modalities of transportation.
Transportation costs are a significant determinant. Existing facilities, particularly in the Midwest, are ideally situated in industrial parks and in areas that feature wide boulevards, adequate land, close proximity to a highway, near or in a foreign trade zone, and where labor is available.
While there is an adequate supply of land in Northeast Ohio, there is a limited supply of land sufficient to site larger distribution centers, such as those required by e-commerce firms.
How can companies find properties that align with these trends?
Consider seeking a qualified real estate expert who understands these issues and the inventory in the market. Find someone who specializes in warehousing and distribution centers with knowledge of your industry. Then engage a qualified facilities planner or engineer to analyze your current facilities to diagnose their shortfalls and provide options.
This team will help you identify land or properties, the costs associated with modernizing, redevelopment or new construction, and potential tax and financing incentives. It takes a special set of skills to navigate all the possibilities because each involves many moving parts.
However, if you decide to move forward with new construction, consider your exit strategy. You need to know the facility you build is suitable to sell to a broad spectrum. An overspecialized facility naturally limits the market for potential buyers.
You don’t have a plan unless you have a backup plan. Try to envision the building’s use, and your needs, far into the future, so you don’t get stuck with an unsuitable property. ●
Insights Real Estate is brought to you by NAI Daus