Wednesday, February 27, 2013

We Have Outgrown Our Location But Don't Want To Move...Now What?

I provide Location Advice to owners and occupants of industrial buildings in Southern California.

This post provides advice to companies that have outgrown their current location but don't want to move.

The reasons for not moving that I hear frequently are...moving is too expensive, I own the location, I have time to run on my lease, my rent is below market, I don't want to take on additional fixed overhead in case business should decline, etc.

The fact remains, however, that the company has outgrown their location and this creates operational headaches which lead to inefficiency and ultimately loss of profit. If your company finds itself in need of additional space and you don't want to move, what should you do? Below are some suggestions for you to consider which may solve the operational space needs while addressing the concerns outlined above.

Before we delve into the solutions, let's diagnose the problem, shall we? What is(are) the reason(s) that you have outgrown your location? (Congratulations, by the way, this is a good problem to have as it often signals an increase in business).

Did your company secure a piece of business that cannot be fulfilled in your current location? Has the growth come organically through an increase in the industry? Did you add employees? Has the way in which you conduct your business changed? Have you acquired a competitor or another product line that must be folded into your operation? Have you purchased new machinery or processes that require additional space? Has one of your suppliers asked that you warehouse some of their product where before the product was dropped shipped directly to your customers? Have you brought a formerly outsourced function back into the operation?

The way in which you answer these questions may determine how we solve your space issue (and what type of space you need...production, warehouse, or office). So in no particular order, here are the suggestions that I make to companies...needing additional space...but who don't want to (or cannot) move.

Add additional office space to your location: On the surface this appears to be an easy fix. Please consider the cost of the improvements ($45-$75 per square foot depending upon walls, plumbing, upgraded finishes, etc.). If you own the location you may be over improving your building for the market and this could affect future resale timing and pricing...just ask my friends at DMG. If you lease your location, you will need the owner's approval AND you will be leaving the improvements in the location if you move at the end of your lease. Some occupants have found great utility in modular furniture...flexible layouts and you take the furniture with you if you move. Other considerations are the city in which you operate (the improvements will have to be permitted) and the parking ratio. Generally, office space will require 4 parking spaces for every 1000 square feet of space. Most industrial buildings are parked 2 spaces per 1000 square feet (including office, production and warehouse). You may be limited as to the amount of office space you can add to an existing configuration.

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.

Add an office mezzanine:  All of the considerations outlined in the previous "add office" paragraph apply here as well. The differentiation is that in addition to adding office space you are also adding square footage to the overall structure by creating a second story. Parking, city permitting, clearance in the warehouse (because you don't want the second floor to be sufficient for Munchkins only), cost (structural footings are required to brace and support the mezz and are consequently $15-$20 per square foot more expensive than first floor office space). If you create an office mezzanine, are leasing the location, and renew your prepared for the landlord to base your new lease rate on the "increased square footage" including the new mezz space you added.

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 close by. As a frequenter of this blog, you know that I have written previously about reasons that companies move. The number one reason I see is that the company has leased additional space (s) to accommodate growth and now the operation is inefficient. 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 some cases it works and can solve a space issue. The best example that comes to mind is our client Designworx Packaging. Designworx needed an upscale office image combined with a plain vanilla warehousing function. The two functions were diametrically opposed and unattainable in one building. The solution was to relocate the office function into an owned location and leave the warehouse function at the existing issue solved. Designworx has operated out of the same upscale office space for 13 years and the warehouse ebbs and flows as needed.

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. My client, Greg Parsons of Summit Warehousing can discuss your specific needs with you.

Add building square footage to your location: This solution would only apply if all of the following criteria 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. CJ America recently purchased a location with excess land. CJ intends to convert an obsolete manufacturing plant into a food production facility at the cost of many millions...very costly to relocate in the event additional space is needed. CJ is well positioned as they can expand upon the excess land by adding additional production or warehousing space.

Utilize cube by reworking your racking plan and purchasing a high reach forklift: My client, Raymond Handling Solutions can assist you in evaluating this option. According to Simon Walker of Raymond Handling Solutions, Every time you narrow your aisles in to a narrower aisle configuration, you gain approximately 33% increase in pallet storage density. Therefore moving your Wide Aisles to Narrow Aisles, you would increase storage density by 33% and moving from Narrow Aisles to Very Narrow Aisles, you save 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.

To talk to a materials handling expert  call Raymond Handling Solutions at (562) 944-8067 or visit Raymond Handling Solutions.

Add another shift or two: My client, Advantage Adhesives prolonged moving for several years by adding a second and then a third shift. The move was projected to be costly because of the power requirements and relocation of several large coating and slitting machines. According to Greg Lane, the President and owner of Advantage Adhesives, the advantage (no pun intended) of the second shift in their case was that most of their overhead (rent, exec salaries, benefits, etc.) was covered in the  business generated by the first shift. The second and third shift became very profitable as a result. Greg warned, however, that a complete run must be accomplished in the additional shifts...raw materials to finished goods and out...or work in progress is produced which consumes rather than saves production space...just the problem we are trying to solve.

Gear your lease terms (or your desire to own) to your growth projection: The best advice is saved for last..."an ounce of prevention can be worth a pound of cure". If your company is rapidly growing, please don't buy a location or sign a long term lease (in excess of three years)...even if your location advisor encourages otherwise. You will avoid the uncomfortable problem of too little space.

Monday, February 11, 2013

A Piece of Location Advice in Fullerton, California...Cooperation Among Two Lee Offices

I provide Location Advice for owners and occupants of industrial buildings in Southern California. Tim Cronin, Bob Sattler and I recently were engaged to sell a manufacturing building in Fullerton, California. The Orange County Register thought the story was worthy of a mention and penned the article below. Thanks to Rick Clough of the Orange County Register for the kind attribution. If you would like to read the article, please click the link below.
Orange County office market looking up

Thursday, February 7, 2013

Financing a Commercial Building Purchase

I provide Location Advice for owners and for occupants of industrial buildings in Southern California. I recently authored a post entitled The Buying Motivation. I would encourage you to read this post before you consider purchasing a location as there are some factors to consider prior to making a large investment such as this. We will now assume that your company meets the criteria necessary to consider buying a building and must now figure out how to finance it. There are several ways to finance the purchase of a location...conventional, private party, seller financing or SBA financing. This post will discuss SBA financing in great detail as this form of financing is used by a large percentage of buyers who purchase commercial real estate in Southern California. I have enlisted the help of my friend and colleague, Mark Rozelle of Rozelle Financial to assist me in the explanation. You can contact Mark directly, by clicking on his name or company name. You will be redirected to Mark's email address and company website. Discussed will be a history of SBA financing, types of SBA financing, eligibility requirements, business qualifications for SBA financing, and the process of obtaining SBA financing for the purchase of a location.

History of SBA Financing: Mark explained that small businesses have been given a huge boost by the federal government through the Small Business Administration’s SBA loan programs.  These loans are almost always the best choice for a business owner when he/she wants to buy a commercial building, buy another business or capitalize the business with long term working capital.  In the most recent government fiscal year over $30 billion in SBA loans were approved.  These loans were split almost equally between the two SBA loan programs known by their government code section:  504 and 7(a). SBA loans are designed to help businesses be more successful.  By requiring smaller down payments to purchase real estate, they leave more cash to be invested into a business.  By offering lower interest rates, they help a company’s cash flow.  By financing business acquisitions when banks shy away, they keep small businesses active and growing. By providing permanent working capital they help businesses keep up with growth opportunities. The program is very efficient and tightly regulated to make sure that every tax payer dollar used by the program goes to help a company that needs it.

Types of SBA Financing: Mark identified the SBA as the only source of commercial real estate loans that require as little as 10% down.  Non-SBA loans usually require 25% down. When buying real estate, borrowers can also finance the tenant improvements and renovation of the building at up to 90% of the appraised value. The most important requirement to keep in mind is that the buyer’s business must occupy 51% of the building. Special purpose properties can only be financed to 85%.

Most real estate buyers prefer the SBA 504 loan program. This program provides for very low and long term fixed rates.  In this program a bank provides a 50% loan in first position and the SBA provides a direct loan in second position for 40% through a non-profit agency called a CDC.  The SBA loan is a 20 year fixed rate loan.  Bonds are sold every month to fund these loans, and the price on those bonds determines the rate.  Recently rates have been below 4.5%. The first TD loan differs in terms from one bank to another with the best rates generally tracking slightly above the SBA. The SBA has a prepayment penalty that declines over the first ten years, and bank loans often have penalties for the first five years or longer.
Alternatively, the SBA 7(a) program can be used to purchase real estate. With this program a bank provides a 90% loan and the SBA gives the bank insurance against a default.  These loans are generally adjustable, but a few banks offer fixed rate 7(a) loans. The loan fees are quite a bit higher and a lien may be required on your residence or other property. A prepay penalty that disappears after three years may make these loans the best choice for buyers anticipating a short term hold.
SBA 7(a) loans can be used to refinance certain real estate loans and other business debts.  Some rules apply to make sure the limited SBA funds are not used up on refinances. The loans being refinanced must have unreasonable terms, such as a balloon due soon or extremely high interest rates. 
Eligibility Requirements: According to Mark the SBA has a large rulebook that defines which companies can borrower through the SBA program.  These rules make sure that companies are not too large, too speculative, too passive or morally questionable.  This rulebook is available on line. You may access the rulebook by clicking here.  Since it is a PDF document, you can do key word searches for topics of interest.
Most businesses are eligible, but here is a list of some of the businesses that cannot borrow through the SBA:  non-profits, lenders, life insurance companies, foreign businesses, religious institutions, political institutions, businesses that exclude individuals and highly speculative businesses.  Many franchises are eligible, but some are not. Most individuals are eligible, but the following are not:  those who have neither US citizenship nor permanent residency status, those with liquid resources that are too great (generally more than the cost of the building for real estate loans), those who have defaulted on government loans previously and those with certain criminal convictions.  Mark can speak confidentially with you about your situation and advise about your personal eligibility.
Business Qualifications for SBA Financing: Mark continued by stating that businesses must be small to qualify.  There are two different standards for this determination.  For 504 loans businesses must have a net worth below $15 million and a two-year average after tax profit of under $5,000,000.  Some exceptions apply to these levels.  For 7(a) loans and as an alternative measure for 504 loans, the government has established a separate definition of small for each type of business based on either the number of employees or gross revenues.  In general, companies exceed the definition of small when they have a dominant market share in their industry.  The government doesn’t want to promote monopolies.  Very few businesses that seek SBA loans exceed the size standards. You can contact Mark to discuss your situation and confirm your company’s eligibility.

The Process: Mark cautioned that SBA real estate loans generally require a 45 to 60 day escrow, but if tenant improvements are extensive, more time may be needed.  These loans can also be used to build a new building, in which case the escrow cannot close till the construction drawings are complete and approved. There are several approvals and third party reports such as environmental and appraisal must be completed prior to funding.

Please visit the Rozelle Financial website for additional information or to apply for an SBA loan. You can also reach Mark by phone at 714.710.9400 or email