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Strategic planning critical to successful real estate deal
As some parts of the economy start to stabilize and land acquisition and construction costs remain lower than historical rates, development activity is finally picking up in West Michigan — and that’s good news.
In the past six months, we have seen an increase in the number of businesses that want to take the ownership plunge. The allure of ownership is strong, and so are the advantages. Consider:
- Ownership brings greater ability to control fixed costs. In addition, property taxes are capped once you buy.
- Financing is becoming easier for many ongoing commercial businesses to secure.
- Capital investments translate into equity that will likely appreciate in the future.
But businesses still need to make sure they are doing the right kind — and the right amount — of planning before signing a deal. It’s crucial to think about the entire investment you will make, in both time and dollars, well in advance of starting the process.
Take the devil out of the details
Strategic planning can make a big difference in expectations, cost and stress for a commercial real estate purchase. The more homework you do up front, the smoother the process is likely to be. Some of the major steps businesses should consider include:
Engage a broker: Retain an experienced real estate broker who knows the local real estate market and who is also familiar with your industry. West Michigan has excellent brokers who specialize in office, medical, industrial and retail commercial properties. Their knowledge, in combination with their experience in negotiating deals, will wind up saving you time, money and probably heartache.
Develop a line-item plan: Working with your broker and attorney, establish a detailed acquisition plan. Be sure to include a factor for time and a factor of cost for each step of the process — from due diligence all the way through to turning the lights on in the new facility. Depending on the complexity of your proposed use, consider engaging other consultants along the way, such as an engineer, architect, contractor or logistics consultant.
Conduct due diligence: Learn as much as you can about both the property you like and the seller before you sign a contract and conduct the actual due diligence. The history of the property and the reputation of the seller can have either a positive or a negative impact on the transaction. If confidentiality is important, utilize your broker to start the discussions with the seller. Your attorney can have preliminary discussions with the municipality about its goals for the property, including its development or redevelopment potential and its viability under applicable governmental regulations. Build in a walk-away provision that will allow you adequate time to thoroughly and thoughtfully evaluate the property in an organized fashion. Consider the size of the property, environmental contamination, title and survey condition, rezoning and other governmental approvals needs, and financing to come up with a realistic time frame and assure that the purchase price is reflective of the condition of the property.
Evaluate the total project costs: The purchase price is only one component of the cost of your transaction — and probably the most straightforward. There are lots of costs that won’t be obvious at first blush. For example:
- Does the property have the infrastructure — such as water, sewer, utilities, proper access — to support your operations? If not, what is the cost to make it usable?
- What environmental or other governmental approvals will you need to have? If you are looking at unimproved property, be sure to take its current zoning into account. What looks to be the “perfect” site for your business could quickly turn into an expensive undertaking if it requires rezoning or changing a master plan.
- What will it cost to make the property actually usable for your business?
- What are the costs of holding the property after you purchase it but before you can move in?
- How about relocation expenses, such as notifying customers or clients, the move itself and operational downtime?
Account for space planning: If you are looking at an existing facility, evaluate the best use of space for your business before you buy it. Chances are you won’t be able to move into an existing space without some renovations. What is the most productive floor plan for the new location that will encourage lean, productive workflow and good interactions among your employees? An architect or other consultant may be helpful in this planning.
Research incentives: While the future of a number of Michigan’s tax incentives are still up in the air, it is likely that many of those, such as the brownfield program, will survive in some form. Your attorney should be able to identify the various potential incentives and, in conjunction with your accountant, help you evaluate the economic benefit.
Properly document your needs and expectations: Before you enter into any agreement, consult with an experienced real estate attorney. Experienced counsel will be able to identify potential pitfalls, document your expectations and protect your legal interests. A properly documented transaction should ensure that everyone has the same expectations and avoids "surprises" — both before you buy the property and, even worse to a buyer, after you own the property.
Melissa N. Collar is a partner at Warner Norcross & Judd LLP and chair of the firm’s Real Estate Services and Condominium practice groups, as well as a licensed real estate broker. She can be reached at firstname.lastname@example.org or (616) 752-2209.