The granddaddy of these unexpected problems is your loss of time and focus on the core business during a necessary relocation. There are key components to every move that consume time and attention, such as telecommunications and data, furniture, stationery and business cards, construction and interior design, as well as the actual physical move.
* Telecommunications and data. Are you buying a new system or relocating the old? When will phones be cut off and for how long during the physical move? Who will be there to ensure everything is up and running come Monday morning?
These questions are basic yet critical. If clients and customers cannot reach you by phone or e-mail, you may not be able to conduct business. In most cases, there are separate providers for voice and data. The phone company can get you a dial tone, but accessing the Internet is someone else's problem. Computer consultants can get your network problems addressed, but leaving your partner in the next office a voicemail requires a different service provider.
In all situations, coordination is the key. Consider implementing new systems before the physical move in order to work out the bugs, and don't try to install everything at once. Do it in stages.
* Furniture. Relocating always involves furniture. You'll need to decide whether to purchase more than you already have, what stays and goes, and what to do with old furniture that won't be moved. The list and level of detail can be overwhelming.
If you are contemplating furniture systems, check out the parts list of one office cubicle. The decision to choose a furniture vendor will result in several meetings and presentations that require decisions from the top. In addition, discarding older furniture takes some effort. Selling it on the secondary market or donating it to a nonprofit organization will also require time.
* Stationery and business cards. The letterhead and all the peripheral documents need to be changed. You'll need to determine how much to order between the decision to move and the physical move. And you also have to determine what type of relocation announcement to send out to clients and vendors. The key is planning ahead so that once you've moved, you're not sending out material with old addresses and phone numbers listed.
* Construction. Assign a point person who will be responsible for maintaining construction budgets and schedules, as well as collecting and maintaining the list of material selections, such as paint, carpet and wall coverings. This will make it easier to oversee the process and catch any mix-ups early in the process.
* Interior design. This can be related to construction to some degree, but the real issue is how everything looks and if it promotes the corporate statement that you want. Where do the pictures go and who hangs them? What type of chairs should be in the reception area? What colors go with the carpet and the wall coverings?
* Physical move. The final piece is determining who to use to actually move your company. Choosing the proper moving company may be impacted by various equipment warranties for computers and furniture. Picking two or three companies to bid on the move is always wise. You will be surprised at the range in quotes.
To ensure the entire process goes smoothly, you may want to consider hiring a project manager to oversee and coordinate all aspects of the relocation. And appointing an internal team member to coordinate with that project manager helps at all steps along the way.
Nothing can assure a perfect move, but planning ahead will certainly mitigate the risks.
Bill Ehret is the president and a founding principal of Summit Realty Group, a member of the Cushman & Wakefield Alliance. He has held the professional designation as an active office member in the Society of Industrial and Office Realtors since 1989, and has been involved in more than 600 commercial real estate transactions since 1982. Reach him at (317) 713-2106 or behret@SummitRealtyGroup.com.
There are three basic questions that any business should ask when considering the alternatives of owning versus leasing.
* What will my business be like six to seven years from now?
* What is my internal cost of capital?
* Is real estate a core component of our business strategy?
Looking into the crystal ball
Predicting the future is a tall order and a challenging task in today's fast-paced business environment. Knowing where your business will be and having a specific plan to get there includes having a good grasp of the physical plant that will house your employees and products, and the processes that make you a business.
If ownership is desired, be certain that you can envision your company and predict business demands and trends at least five years in the future.
Real estate is, by nature, capital intensive and not a liquid asset. Making a mistake on size, location or product type may take years to recover from financially.
The magic about predicting real estate needs six to seven years down the road has primarily to do with recognizing that appreciation of the real estate will occur, equity is being created with most mortgage structures and stable occupancy costs may swing in favor of owning versus increasing lease rates when compared to typical lease terms of three to five years. Unless you're in a hyperinflation environment, owning real estate for less than five years becomes a break-even proposition at best.
More important than the time frame may be the impact of predicting sales growth and the support required to meet the growth. Support can mean people or head count, which translates into office space or inventory, which translates into warehouse or manufacturing needs.
Organizations predicting 15 percent to 20 percent annual growth will find it difficult to plan an owned facility. If markets shift frequently, flexibility may be key, and leasing becomes the optimum solution.
Internal capital costs
CFOs know how to keep score in many ways. But the most important way is deploying an organization's capital. Cash is king in more ways than one, and it is not uncommon for businesses to achieve higher rates of return on cash deployed back into their businesses through product enhancement, product development and employee training.
Real estate is capital intensive and, in most cases, significant dollars may be deployed in real estate as equity or down payments, with returns ranging from 3 percent to 10 percent until such time as the real estate is sold and the capital can be redeployed. Many businesses achieve greater than 20 percent returns on their capital through their core business applications and find it difficult to tie up money in limited liquidity investments like real estate.
The counter point is simple. Real estate is a great place to park money, if it is available to be parked, and over time, it becomes a great asset source for mature businesses and a potential leveraging vehicle for funds in the future. Owning real estate should not be discounted totally by financial measures, but understanding the benchmarks and your internal cost of capital is a critical evaluation.
Do you really want to be in the real estate business? Even owner-occupied investments still require a degree of managerial and financial resources to make certain things work right, the lights turn on, the grass gets cut and the snow gets plowed. There are many instances, such as a strategic location for retail trade, a building is highly improved with special features, unique manufacturing processes, historic fundamentals or cultures, where owning the real estate is considered a core component of the business unit.
If you find yourself in this environment, by all means, own. But remember, you make your best investment when you buy by buying right and not when you sell.
Bill Ehret is the president and a founding principal of Summit Realty Group/A member of the Cushman & Wakefield Alliance. He has held the professional designation as an active office member in the Society of Industrial and Office Realtors since 1989, and has been involved in more than 600 commercial real estate transactions since 1982. Reach him at (317) 713-2106 or behret@SummitRealtyGroup.com
The following, in order of preference for a tenant/lessee, are the three common ways a company can incorporate language in the lease document that will protect its right to grow.
* Option to expand
* Right of refusal
* Right of first offer
Option to expand
An option to expand is the most favorable choice for the tenant and the least desirable for a landlord, because it is a unilateral agreement in favor of the tenant. An option gives the tenant rights to a specific space at a specific time some time in the future.
The landlord must be able to deliver this space if the tenant exercises its rights to the space. This can effectively take space off the market and tie the landlord's hands for future leasing, so it is not the first choice for landlords to grant such an option.
Complicated options to expand will include specific notice periods for exercising or waiving rights to the space and delivery of the space, and may include language related to a formula for determining rental rates and tenant improvement dollars.
Right of refusal
The right of refusal is the first attempt to level the playing field in the landlord/tenant relationship. Whereas options tend to more firmly tie up the space, a right of refusal provides a mechanism by which the landlord can continue to market vacant space to a third party, while the existing tenant has the last look. As the name implies, it gives an existing tenant the right to accept or refuse the lease terms on space that may be appropriate for future growth.
The biggest difference between an option to expand and the right of refusal is timing. Whereas the option has a defined time window when space must be made available to the tenant, the right of refusal may be an ongoing matter that could surface 30 days after you move into new space or three years down the road, when a third party tenant is willing to enter into a lease for the space.
There are distinctions between ongoing rights of refusals and one-time rights. Ongoing rights continue throughout the initial lease term; with one-time rights, the first time the space is offered and passed on because expansion is not necessary, the rights to the space no longer exist.
There can also be multiple levels where companies may fall in line, with one company having the right of first refusal and a second company having a right of second refusal.
Right of first offer
The right of first offer simply requires the landlord to offer vacant space to a tenant before it is offered to any other party. This is particularly important in buildings that have higher occupancy rates or growth tenants competing for space that may become available from time to time.
Unlike the option to expand, the right of first offer is specifically controlled by events unrelated to the tenant and can be difficult to plan around.
The right of first offer should not be dismissed as a normal event that suggests a landlord will offer space to a growing tenant, and it is a concession by the landlord. This provision requires the landlord to communicate with the tenant about space availabilities and helps both parties to plan for future growth.
These three mechanisms give some comfort for planning and protecting a company's right to grow in a specific location. The level of comfort becomes a negotiated issue, and the complexity of the language should be handled by experienced real estate attorneys and negotiated in the context of the current market conditions for the type of space.
Any combination of these provisions can occur in a lease and all will come with critical notice of exercise dates. It is important that the tenant occupant be aware of these dates as they approach and develop a strategy to take proper advantage. Bill Ehret is president and a founding principal of Summit Realty Group/A member of the Cushman & Wakefield Alliance. He has held the professional designation as an active office member in the Society of Industrial and Office Realtors since 1989, and has been involved in more than 600 commercial real estate transactions since 1982. Reach him at (317) 713-2106 or behret@SummitRealtyGroup.com.