Building value Featured

8:00pm EDT June 25, 2007

Brentwood Bank client David C. Stoehr is a perfect example of how proper planning and market intelligence can pave the way for a successful commercial real estate venture. Stoehr is founder and president of Chem-Trade International, which designs and builds pollution control equipment. Like most entrepreneurs who built their businesses from the ground up, Stoehr eventually expanded to the point that he needed more square footage.

The problem? He couldn’t find what he wanted, so he decided to construct a new warehouse/office building — one larger than just his business would fill. “His conversations with other local business owners indicated that there was a need in his area for this type of flex-space facility. Additionally, the construction of a larger facility would present an investment opportunity in which he could supplement cash flow and build wealth through equity over time,” says Jeff Skocik, vice president and manager of commercial lending at Brentwood Bank.

Skocik sees more and more business owners/principals contemplating similar commercial investment opportunities — both out of short-term necessity and for their long-term equity and revenue potential. Before taking a leap into the commercial real estate market, he advises business owners/principals to consider three things:

  1. your current and future needs versus corresponding market opportunities

  2. ultimate project objectives versus your return-on-investment strategy

  3. your financing options relative to the requirements of the specific project type you want to undertake (since those requirements will vary depending on the scope and scale of each project).

Smart Business asked Skocik to address the commercial real estate investment and financing process, in the first of a series.

Why might a business owner decide to invest in real estate?

For many of the same reasons you might decide to buy a home rather than continuing pay rent. Generally, we find that business owners simply realize they are at ‘that point.’

‘That point’ may be when you finally get comfortable with the idea of making a real estate investment and feel it’s time to take it on. Maybe it’s when you realize that you cannot grow unless you acquire additional space. It could be when you need to meet special needs or operating requirements — for example, adding loading docks, refrigeration equipment, the capacity to handle large cranes, etc. Or maybe it’s strictly a personal or business investment decision.

What financing options are available for business owners and individuals who decide to invest in real estate?

The key thing to understand about any such investment is that different banks and financing entities will have different levels of expertise with these kinds of transactions. In order to expedite matters and minimize headaches, it is critical for the business owner/principal to seek out core competencies in areas such as real estate-based lending, construction financing and large-scale project development, if any of these are your intentions.

By ‘intentions,’ do you mean the same thing as your ‘ultimate project objectives’?

Yes, exactly. Your project objectives ultimately follow from the way you decide to approach both your needs and the corresponding market opportunities: you might-pursue and purchase an existing facility or renovate or expand to satisfy additional requirements. Or, if a facility is not available from the commercial stock in the area, you may decide to purchase land on which to design and construct a new facility.

David Stoehr went one step beyond his own needs and decided to also fill a need he found others shared in the marketplace. In doing so, his objective, ultimately, could have involved anything from making a simple real estate investment to undertaking a full-blown development project. It’s important to understand that all of these scenarios involve and require different things, from a financing perspective.

What lessons can we all take from Stoehr’s experience?

Doing your homework is critical. In Stoehr’s case, he did his due diligence on the investment before jumping in. He built a strong case. For instance, he knew that he wanted to lease a portion of the building to tenants. So to gauge interest in his construction project, he pre-leased the property, advertising the building so he could weigh the support of the business community. Also, he researched how many other types of buildings were exactly like the one he wanted to build. He found out there was none, which further justified his desire to invest in a ground-up project.

The question, ‘Should I lease or buy property?’ is difficult for many business owners/principals. By researching the market, predicting income on his investment and estimating long-term returns, Stoehr realized that he had an opportunity to both build-to-suit and benefit financially over time. When that’s the case, the opportunity you have to invest in real estate may simply present too many up-sides to ignore.

Look for more on “Building Value” in future editions of the magazine.

JEFF SKOCIK is vice president and manager of commercial lending for Brentwood Bank in the South Hills. Reach him at (412) 409-9000 or jskocik@brentwoodbank.com.