Recently,
we explored ways to find additional office space within your building. If you missed
the column - you can quickly catch up by clicking the link below.
Follow
the link below to view the article.
We’re
lacking space, so now what?
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In
today’s super competitive, hyper tight industrial market - moving an operation
is problematic as a relocation target may not be available. Not to mention -
moving is expensive, inefficient, and the pay back to your company may be many
years. Alternatively, many groups simply cannot move. Reasons given? Owned are
the premises, special permitting may be in place, proximity to employees, a
lease which doesn’t expire for several years and so on.
But
if your operation needs more room the regardless of the reasons above, space
must be found. Today I’ll share a few ideas as to how.
In
our experience, many operations believe they’re out of space when in reality a
bit more can be found in an existing location.
Add a production mezzanine: A production
mezz can be a great way to increase production square footage without consuming
floor space. If you own your location, add machinery or processes, look into
this solution.
Store some finished product or raw materials outside: Subject to
city ordinances (if outside storage is allowed), a yard or a secured area
outside multiplies your usable square footage.
Lease additional space close by: Whether you
own or lease your location, a temporary fix to your space needs may be
accomplished by leasing space down the street. But be forewarned - you may
create inefficiency. Certainly the upside to this strategy is that the excess
space (if the lease is flexible) can be discarded at the lease expiration (if
the space is no longer needed) or renewed until a more permanent solution
can be achieved.
Outsource a function to another producer: This solution
is potentially costly and should be compared to moving and keeping the function
in house. Some economies can be achieved however if the function is new (and
the upside unknown) or the barriers to entry are formidable.
Separate a portion of the operation and relocate that
portion: Once again with full acknowledgement that the main reason I
see for companies "relocating" is the inefficiency created by
operating from multiple locations - in some cases it works and can solve a
space issue. The best example that comes to mind is a client of ours. Needed
was an upscale office image combined with a plain vanilla warehousing function.
The two were diametrically opposed and unattainable in one building. We
discovered a solution! Relocate the office into an owned location and leave the
warehouse at the existing location - space issue solved.
Use a third party logistics company: Also known as
a 3PL, these independent warehousing providers serve as an outsource for all of
your warehousing needs. A third party logistics company provides a "soup
to nuts" solution for additional warehousing. Included in the per pallet
charge is warehousing, access, shipping and receiving, insurance, etc.
Add building square footage to your location: This solution
would only apply if all of the following criteria exist - you own your
location, the site is large enough to accommodate additional square footage,
and the city will allow additional square footage to be constructed. If all of
these apply, congratulations! You managed to foresee your growth and planned
accordingly.
Utilize cube by reworking your racking plan and purchasing a
swing reach forklift: Every time you modify your aisles in to a narrower
configuration, you gain approximately 33% increase in pallet storage density.
Therefore moving your wide aisles to narrow aisles, increases storage density
by 33% and moving from narrow aisles to very narrow aisles, you save another
33%. Of course this increased storage capacity comes at the price of increased
capital investment in lift trucks and pallet rack. A quick and easy tip to help evaluate
if you can increase your storage space in your current building is to stand at
one corner of the warehouse and look out at the opposite corner. If you can see
the opposite corner without obstructions, you likely have an opportunity to increase
storage cube using increased investment in materials handling products.
Commodity class, stacking height and sprinkler calculation must be considered
before you go vertical.
Add another shift or two: We have clients who have
prolonged moving for several years by adding a second and then a third shift.
Generally, the advantage of the second shift is that most overhead (rent, exec
salaries, benefits, etc.) are covered in the business generated by the
first shift. The second and third shift become very profitable as a result.
So,
there you go. More space than you knew existed.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
Today,
I will delve into the topic of cancel culture. No, not stifling free speech, but
the cancellation of a commercial real estate deal - AKA, how to unwind a
transaction.
As
mentioned in this space over the years - commercial real estate agreements come
in two forms - leases and sales. Unlike our residential colleagues,
commercial leases can make up a substantial portion of our practices - in some
cases 100%. Because many businesses opt to lease the premises from which they
ply their professions and the sale market these days has an acute shortage -
more and more leases are originated. Clearly, cancelling either - sale or lease
- have their nuances - so I’ll spend time on both.
What
precedes each direction is an identification of needs, a survey of the market,
tours of potentials, negotiation and contracts. Departure occurs at the documentation
stage. When a lease is signed, the deal is done - notwithstanding fit out and
move-in. When a Purchase and Sale Agreement is executed - the deal begins. As
you can gather, unwinding depends upon where you are in the process. Allow me
to dissect.
Leases. Until you scratch your John Hancock on that 17 page tome -
you can walk away - even if you’ve signed a Letter of Intent. In some cases,
after you’ve signed a lease and you don’t timely deliver the deposits called
for - the owner can hit eject. But generally, once you and the owner sign,
deposits and insurance are swapped, a lease agreement is affected. Now. Should
circumstances cause a “delay in possession” - meaning you can’t move in -
beyond what’s outlined - a cancellation may occur.
Ok.
You’re in and things change. Now what? Typically, you’ve three alternatives -
buy-out, sublease, or default.
A
buy-out works like this. With the lease, you have committed to a certain dollar
obligation which is calculated by multiplying your monthly rent by the years
remaining on your term. Let’s say this figure is a million dollars. In order to
achieve a buyout, you would approach the owner of the building and offer her a
fraction of the remaining obligation. She then will analyze whether taking a
buyout is in her best interest. Specifically - with the money offered - can the
costs of sourcing an new occupant be absorbed.
Next,
a sublease. You attract a surrogate to live out your lease and do all of the
things you committed to do - like pay the rent, reimburse the property taxes,
mow the lawn, etc. Beware. Subleases must be ok’d by the landlord - but she
can’t be unreasonable.
Finally,
you walk away and stiff the owner. Never recommended as all manner of legal
recourse will be unleashed. But. It’s an option.
Sales. Recall. When a Purchase and Sale Agreement is signed, the
stopwatch begins ticking. Until a deed is recorded - signaling the race is over
- there are escapes.
The
easiest occurs during a due diligence period. Accomplished within 15-60 days from
execution of a contract is a commitment for financing; a review of title;
inspection; forensics of the leases(if any), expenses and income; and an
investigation of environmental conditions. If any don’t pass muster and a
solution compromise can’t be reached - over and out.
Once
all of the conditions outlined in a contingency period are waived - some money
is at risk. Meaning, the buyer may bolt - but the deposit is forfeited.
Some
may wonder - hmmm. It appears the buyer holds the key. When can a seller
cancel? Simply, if the buyer performs - the seller can’t. My lawyer buddies are
collective saying - uh huh! True. Suffice to say, however, a costly “specific
performance” battle may ensue. Probably, the wackiest example of this occurred
a couple of years ago with a seller we represented. It seemed the seller -
after committing to sell his property - and the buyer waiving contingencies,
discovered a costly pre-payment penalty. I received a call one day from the
seller asking me to cancel the deal. Astonished, I asked - “on what basis”?
‘Because I can’t afford the pre-pay, he replied”. Hmmm. Fortunately, we
persuaded the buyer to walk away. But not without a reimbursement of their
costs and paying their agent.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
