Why Rent When You Can Own?
by Tom Cole
Your business has outgrown its current space, or the space no longer meets your specific requirements. Perhaps your lease is expiring or you’re interested in eliminating the often cumbersome negotiations with a leaseholder.
Regardless, it’s evident a move is eminent and you’re confronted with two options, identify an existing facility that meets your needs or construct a building of your own.
Identifying an optimum space that readily meets your needs relative to cost, function, aesthetics and time may be challenging. In fact, a “ready to wear” facility may not exist for your particular needs. On the other hand, the benefits of constructing and owning your building can far outweigh the costs of renting or purchasing while actually providing a return on your investment. Such an option can actually put money in your pocket rather than simply paying to occupy someone else’s facility. A build-to-suit option allows you to create equity as the facility appreciates and as you invest in the mortgage principal. This path also offers a number of tax advantages including federal and state deductions on mortgage interest and depreciation; loan costs may also be deductible.
When purchasing an existing building, upfront square-footage costs are known variables. However, opting to construct your own facility requires additional leg work. To conduct a cost analysis to identify such costs and determine if building your own facility is an equitable investment, you will need to know:
• Total square footage needs
• Land purchase costs
• Construction costs
• Loan amount
• Term of the loan
• Interest rate
• Annual payment
• Monthly payments
• Insurance, taxes and common area maintenance costs
First-time owners may not be aware of the not-so-obvious costs such as tenant finish, the cost of the building shell, miscellaneous closing costs, legal and architect fees, developer fees, appraisal fees, and engineering, civil and mechanical costs.
While such analysis may appear daunting, doing the homework can greatly ease the process and minimize unforeseen expenses. Following are items to consider prior to beginning construction:
• Hire an architect to secure city approval.
• Carefully engage the services of a trusted general contractor or construction management firm.
• Plan for your future needs. Project how fast your company may grow and plan accordingly in identifying your projected space needs. A word of caution: be realistic. You do not want to over-estimate your long-term space requirements.
• Consider if you need/will need wireless and cable connections throughout the office.
• Carefully manage the planning and construction process. This is time consuming, but the investment of your initial time pays off in the long run.
• Select a financial institution that is willing to be flexible.
• Adhere to the original plan and guaranteed construction costs. Change-order costs can dramatically impact your budget. Make certain your construction professional is willing to identify a “guaranteed maximum cost” for the project with all savings below the “G-Max” to be returned to you rather than padding additional profits to the contractor.
• Consider leasing unused office space to generate additional income and offset costs.
Upon opting to construct your facility a construction delivery method must be identified. For owner-specific projects, we recommend design/build. In its simplest form, design/build is obsessively focused on communication. This method establishes a pre-project team consisting of you, the architect and the construction professional to assure all parties embark on a shared vision of success. Such a process allows the construction professional to be the single source of responsibility yielding no surprises during the project. In essence, creating such synergy grants the project greater cost control as the contractor can estimate project costs as it is being designed.
Tom Cole, Ec.D is Business & Economic Development Manager for S.M. Wilson and Co.
P | 913.322.3900
E | Tom.Cole@smwilson.com