Case 1: Do It Yourself
In this scenario, you are in a fast-paced facility development mode, hold an excellent cash position as well as dependable capital resources, and require a 1.1 million-square-foot facility. You decide to act on your own behalf as a developer and to contact construction firms via a request for quotation describing the facility needed. You seek out properties and negotiate directly with municipal, state, and federal agencies and with the owner of the property.
Advantages: You benefit from effective employment of a good capital position and time flexibility to possibly leverage broker and development costs of 8% to 12% out of the process. This approach is more suitable for large facility development. Excellent rates are available on ten-year or longer lease terms.
Disadvantages: You risk your first priority, delivering to customers, on undertaking a secondary business activity. Self-development risks include unforeseen regulation of property and municipal road blocks that can drag on a project for years longer than planned or even reasonable for the industry. Losses of 10% to 20% are possible in cost leverage capability that broker and developer representation could provide.
Case 2: Classic Style
Your company is a dot-com with anticipation of a three-year ramp-up in sales and high volatility in annual growth. You seek a 125,000-sq.-ft. facility. Your cash position is nil, but you do have two venture capital agreements on which you can base development efforts for the first two years without return. The pressure on immediate direct-to-customer order filling, however, is great. Information from UPS provides a recommended corridor from which to ship the product. You elect to engage a regional broker, but not a tenant representative. In this scenario, you will pay a higher rate by assigning a percentage of the project value to the broker’s fees, but will sidestep major obstacles because of the depth of knowledge that the regional broker has concerning available property and the ownership involved.
Advantages: Pluses include speed to market, quick negotiation with the property owner or developer, an efficient cost structure for a five year lease, and help with local market understanding and municipality incentives. If the broker is able to deal with a property owner or builder directly, you might be able to avoid about 6% of the cost of the project.
Disadvantages: The lack of a tenant representative could weaken your negotiating strength. The builder may seek to take advantage of the 6% cost reduction resulting from the developer’s absence, and claim a portion of the fee as a developer representative.
This Building for Hire
The following chart displays what you can expect to pay each entity in a fully brokered and developed facility lease agreement. Most distribution operations can bypass many of these fees, but increasingly at their own risk.
|Location search agency||$40,000 to $250,000 fixed fees|
|Tenant representative broker||$50,000 to $400,000, plus fixed fees|
|Government commerce representative||No fee, but often on salary incentive|
|AGENCIES BASED ON VARIABLE OR FINANCIAL INTEREST|
|Broker||4% to 12% of total project value (shared with listing broker)|
|Listing broker||6% to 12% of total project value (shared with tenant broker)|
|Developer/underwriter||6% to 8% of total project value|
|Construction contractor||11% to 16% margin on actual construction costs|
|Construction financier||7% to 9% on construction short-term equity at risk|
|Lease purchaser/investor||6% to 9% on long-term investment capital|
Case 3: Well Developed
You want to review a broad range of properties across a region of the United States, but with an immediate understanding of the terms involved in each opportunity. Although you need a 750,000-sq.-ft. facility rather quickly, you have little time to explore each alternative in detail, and wish to balance demographic surveys and municipality negotiations with a strong leverage on construction costs and the return that the ultimate buyer of the lease will demand. You may want the developer to play a broker role in the beginning, but with the understanding that he may direct you to his own developed properties if nothing suitable is found on the open market.
Advantages: Benefits include speed to market, representation by the property owner in many cases, and an efficient cost structure targeting a lease of five to ten years or longer. Other advantages that a developer offers are local market knowledge and assistance with municipality incentives, as well as a good balance of client representation and leverage against the costs of development, construction, and financing. Usually all municipal obstacles are removed in advance on the developer’s targeted properties. The leverage achieved from the municipal representation, speed to market, and bargaining position that the developer has against the construction contractor and long-term investor could save 12% to 15% on project costs.
Disadvantages: Not having a true tenant representative could undermine your negotiating position. Approaching a broker might open up some possibilities that a developer may not offer because he does not represent the properties. You can expect to pay 6% to 8% of the project’s value in development fees.