Friday, August 19, 2016

The Commercial Real Estate is ALMOST Perfect - Now what?

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You have conducted an exhaustive search with your commercial real estate adviser and have happened upon the perfect space to house your rapidly growing company.

There are just a couple of deficiencies with the building that can easily be remedied - or so you believe.

What appears to you as an easy fix may in fact be a big deal depending upon the nature and motivation of the ownership.

I'll just add an office or six. Let's take for example the addition of some offices so that your key employees can operate within a private setting. You look at the existing layout and figure with the removal of a couple of walls here or moving a door there, you are golden. What many fail to realize is the cost, permitting, time, and effort required to simply add a couple of offices. Adding office is expensive! Simply moving a wall doesn't account for the air conditioning ducts that must be re-routed, the ceiling grid that is interrupted, new Title 24 energy efficiency upgrades that are triggered, the holes left in the flooring, and additional parking spaces that may be required. The offices will need to be permitted. A layer of bureaucratic challenges awaits the unsuspecting. Once the true cost of the new offices is determined, we now must negotiate who pays - you, the owner, or some combination of you and the owner. Generally, an owner will be reluctant to pay for an improvement that adds value today but may need to be ripped out in the future. Consequently, most owners will dump that cost onto you, the occupant. If an owner has the money to invest in tenant improvements, he may want to be paid back for those improvements over the term of the lease. This is known as amortizing the tenant improvements. Simply structured, the cost is multiplied by some factor of money and divided over the term of the lease to calculate a monthly amount which will be borne in addition to the base rent.

Lights, camera, action. Ok, maybe you need to increase the electrical service into the building so that your machinery runs smoothly. Easy, right? Ummm, not necessarily! Power into an industrial building originates at the transformer. In modern buildings, the power is then routed underground through a conduit into a switchgear located in the warehouse. So, adding power becomes a function of how much is available at the transformer, how large the conduit is into the building and the size of the switchgear. All boxes must be checked in order to economically upgrade the power feed into a building. If the transformer capacity is insufficient, the utility - SCE or a city power utility - will need to replace the transformer. If the feed into the building is too small, the pavement will need to be jack hammered, conduit replaced, and the switchgear changed. Yep, you guessed it - at a significant cost.

Who's next door. The space may work but is your use of the space compatible with the neighbors and allowable within the zoning? If not, you will face some cranky folks next door and a city with reams of paperwork for you to complete prior to your occupancy being approved. By the way, if you undertake a conditional use permit process, plan on the next six months of your life being consumed in minutia. Oh, and by the way, your owner may require you to lease the space regardless and place the risk of getting the use approved on your shoulders.

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