Prime real estate

Eight rules of commercial real estate

Think you know what you're doing when it comes to commercial real estate? Think again. Here are some tips from operations consultant Stephen Harris that you may not have considered.

#1. Don't buy a bargain. Real estate and buildings have predictable value. If something is available cheap, there is likely something wrong with it.

#2. Consider using a buyer's agent, complete with preset agreement. These commercial realtors frequently understand the local market well enough to be worth far more than the cost of their fee.

#3. Don't shy away from converting used buildings. The manufacturing flight to offshore locations has left some fine infrastructure on the books of companies anxious to get rid of it. Prices are good, and conversion takes no more than two months, not 12.

#4. Don't rush. The appropriate process should take from three months to nine months. Plan ahead, and track your process once it begins.

#5. To build new will cost about $55/sq. ft. for dry storage warehouse (no refrigeration), exclusive of site development costs.

#6. To develop a site is a difficult cost to predict, but it should range from $10 to$15 per sq. ft. of building area.

#7. Real estate starts at $25,000 per acre, and can go to triple that for “spade-ready” land in a desirable area.

#8. From the day you close on property, the fastest you can design and construct a DC is about one calendar year.

Site selection SCORECARD

With so many factors to consider in commercial real estate, you'll need a scorecard to keep it straight.

First, ask each department to state its preferences. Then list these criteria in order of importance, says Stephen Harris, president of JAM Management Services.

Next, incorporate these factors into a simple score sheet that allows various sites to be rated numerically on a scale of 1 to 100.

This can take three to six months, and it will require the involvement of top management. But it can reduce the overall time needed for the search and evaluation (years, in some cases).

Here are the things to consider:

1. Size of building. This includes the facility's footprint, cube and parking.

2. Inbound and outbound shipping costs. UPS, FedEx, and the USPS will help you do the calculations.

3. Access to (and cost of) power, gas, water, sewers and connectivity.

   Incentives offered by regional governments (in the form of training, property tax relief and permits).

4. Labor market (education levels of workers, availability)

5. Building condition

6. Purchase and operations costs

7. Encumbrances/rights of way

Other criteria are:

1. Zoning
2. Neighbors
3. Permit process/regulatory restrictions
4. Size and cost
5. Site development costs
6. Construction cost index

Limit yourself to a proscribed time period to search out and evaluate alternatives. Appoint a key employee or a consultant to conduct the search and complete the scorecard for each site. Make your decision from the two or three best scoring alternatives, and keep two of the options “in-play” up to the signing of a “letter of intent” or a “purchase and sale” agreement.

Remember that due diligence is a process of objective analysis that ultimately allows you to make an informed decision. If you conduct the search correctly, you will see two or three alternatives float to the top, frequently with very similar scores. Choosing from among these like options will then be a no-lose decision.