Real Estate Planning For Business

If you are interested in setting up a business or even if you are already running a business, you likely have a business plan. I hope you do, anyway. Business plans are very important in helping a business owner succeed. A business plan presents an overview of the business and the plan by which the business owner intends to operate and succeed with the business. It should include a description of the operations, regional market analysis, start-up budget needs and a projected cash flow statement, list of items needed to set-up the business, a schedule of activities to conduct in setting up the business, a growth plan, legal entity structure, and much more. Just this list of business plan components alone should demonstrate how important a business plan is. A business plan, in part, helps business owners identify what they need to do, how to do it, and the resources they need to make it all happen. It’s a great tool to keep you organized and on track. Many business owners need real estate (not all), so real estate planning for business is a critical element of business planning.

During my years as a business consultant, I helped many people craft their business plans. I also helped people who already had businesses update their business plans. I routinely noticed most people didn’t understand the importance of including a real estate plan. It is understandable that this was the case – and I still see this today – because most clients were new to the whole business thing. That’s where I came in to help. Also, when it came to helping people who already had a business yet wanted help building their business to the next phase, namely growing the business, I typically found that the main thing that was holding them back was a lack of understanding their real estate needs. Enter the real estate plan.

Why is a real estate plan so important? Because for many businesses, commercial real estate is essential in order for the business to exist. Even if your business does not directly need real estate such as an office space for you or your employees to work, there may be ancillary requirements such as a storage facility or vehicle parking space. This is the easy response. This response simply states that real estate is important because I need it. The useful answer is actually more substantive than that. Finding a property like an office, retail space, or storage yard may not be difficult. Yet imagine during your commercial real estate hunt you visit a property to evaluate it and then realize at that moment that you may not understand everything you need in a property for your business. That is not the right time to discover this problem. Or perhaps, and this can even be more problematic, you hastily lease or buy a property and later realize it doesn’t work for your business. You have a lot of money tied up in that property and you can’t operate your business the way you intended. I meet many people who experience significant delays in setting up their business or they lose out on setting their business up the way they wanted because they were not adequately prepared for their real estate selection. Let’s avoid that problem.

There can be many consequences of not having a real estate plan and all of them are bad. Since preparing a real estate plan is easy – more on that below – there should be no concern about getting it done. Failing to have a real estate plan can lead to failing to set up your business or at least failing to set it up for success. I see this unfortunate result often. Fortunately, the risk of you experiencing this problem can be easily mitigated.

Not having a real estate plan can lead to significant delays in finding the right property. Imagine as you visit multiple properties, you identify while your there that the properties are missing something you want or need. You are wasting valuable time running around looking at properties. Whereas with a real estate plan laying out your detailed requirements can help you and your real estate agent narrow down which properties to visit. In addition to delaying the set-up of your businesses, this delay could put your financing at risk (i.e., missing your commercial lender’s deadline to get your loan approved). Or perhaps other sources of financing are no longer available because they couldn’t or didn’t want to wait for you. Also, while you are fumbling around trying to find a property that you still don’t understand what it should be like, the one property out there that would work for you just got rented or sold to someone else. And, that someone else may now be your business competitor.

Without detailed requirements for your real estate needs delineated in a real estate plan, you could unwittingly select a property that is missing something important. Consequently, you may not be able to set up your business; you may have to change your business; or you are delayed in setting up your business because you have to modify the property (hopefully you would be able to modify it…); or you have to spend money to modify the property that you needed to pay for some other aspect of your business. Imagine this happening to you. Wouldn’t you like to avoid this? Of course.

Resources are required in obtaining and building out real estate for your business. The obvious one is money. Others include permits, contractors, and materials. You may discover that a lot of time is required in obtaining permits or finding the right contractors. Also, some materials may take a long time to acquire especially if they are tailor made for your business. It seems to make a lot of sense to know what these required resources are so you can start lining them up and have some of them ready when you obtain your property. Waiting to do so after finding your property can yield even more lengthy delays. This information should be included in your real estate plan.

And, obtaining real estate involves what can be a complex and risky legal process. It behooves business owners to be educated on that process so they are ready to make their important decisions on selecting a property and on defining negotiating terms.

One’s commercial real estate requirements are specific to that person and their business. Yet, with insight from my consultant and real estate broker experience, I am going to list several items for you to consider. This information should help you significantly, yet please consider additional items to add that are important to you.

Start by ensuring you fully understand what your business needs to operate in the way you want it to operate. List those items. You will find that much of what you need for your business has a direct link to what you need from your real estate. For example, how much space do you need? Please don’t guess, please. Determine how much space you need for storage, customer reception and traffic pattern, receiving shipments, product display, restrooms, employee meetings, office/management functions, privacy for employee-customer conversations, special equipment and materials, etc. “Space” includes floor space, ceiling height, layout, parking, and more. Having sufficient space is obviously quite important and the only way to know how much space you need is to identify every single aspect of your business operation that needs space. There is more to consider than space; this was just an example. Got it?

Here are some items to consider:

* Business functions to be conducted on site
* HVAC capacity and placement, exhaust systems
* Fire suppression systems

* Utilities, lighting – sources, placement, configuration
* Sound attenuation to mitigate loud noises generated by your operations and by operations of your neighbor businesses.
* Space for special equipment like medical equipment, x-ray machines, large machinery, training equipment
* Shape and floor plan layout
* Privacy with customers
* Customer capacity and traffic flow
* ADA accommodations like ramps, wide door ways, and elevators
* Product display
* Storage space and type like refrigeration, HAZMAT separation
* Medical/food licensing
* Vehicle traffic flow and parking capacity
* Zoning ordinances
* Permits (building, planning, zoning, health department, utility, fire marshal, etc.)
* Delivery services. Location for delivery vehicles and drop-off of shipments.
* Space for special events
* Restrooms
* Neighboring business. Consider whether they may deter and add customer traffic.
* Prospective or planned renovations, maintenance, development, etc., of the facility and neighboring location by the landlord, property manager, municipality, or utility companies.
* Proximity to complimentary industry. For example, a medical services office near a large medical facility or an auto repair business near auto dealerships.
* Services provided by landlord. What help is the landlord willing to provide such as build-out, utilities, delayed rent while setting up, maintenance.
* Insurance potential. Consult with insurance provider to understand issues that may impede obtaining necessary insurance.
* Ability to display signage and other branding materials
* Visibility and accessibility by customers, service personnel, employees.
* Material condition
* Security
* Scalability so that the property can accommodate changes and growth in your business
* Advantages and disadvantages of leasing versus buying

Real estate planning for business … sounding quite important?

– Template –

Real Estate Plan

My Business LLC

1. Business Operations.  Provide a very detailed break-down of all aspects of your business operations.  The real estate you acquire should accommodate all of your business operations.

Operations	Required Real Estate Elements
Client consultations	At least 3 private offices/meeting rooms.
Cooking/Food prep with 3 fryers, flattop, gas-heated	Fire suppression system and ventilation system over cooking equipment, gas line from provider feed. Fire Marshall permit. Tile flooring.
Staging of portable exercise equipment for students	Additional floor space for storage racks 24” deep x 15’ wide, 3 levels high. Square space accommodates classes and staging of equipment better than rectangular space.

2. Location. Your market analysis included in your business plan will lead you to a general area such as a region of your state or county or city. This section isn’t intended to simply reiterate that.  In this section identify and describe desired locations broadly and specifically. Broadly may be “rural” or “light commercial near residential concentrations” or “inside/co-located with a large office complex”, etc.  Your broad description can be a combination of multiple elements.  Also include specifics such as references to proximity to highways and main roads, other businesses or commercial entities, residential settings, etc.  These details aid in searching for real estate and then evaluating it against your selection criteria that are intended to optimize its contribution to your business operations. These details can also assist in defining insurance requirements, leasing terms, types of financing, and evaluation activities for the feasibility study period for commercial real estate purchases (pertinent to purchases in Virginia).  Always consider zoning districts since they define which uses are permitted and ones that are prohibited.

3. Specific Requirements. In this section list specific requirements for the real estate. Refer to the list presented above for a start. This section can serve as your checklist as you search for and eventually select a property. Identify points of contact for permits, inspections, service providers, materials, etc., that are necessary for the real estate and that are funded from your real estate budget.

Requirements	Must Have At Time Of Acquisition	Can Be Added After Acquisitions
In-floor drainage	X
240V outlets for chargers (x10)		X

4. Zoning, Permits, Other Permissibility Requirements. 

Identify the zoning districts that permit uses applicable to your type of business. In some instances, like a business that only needs an office space, leasing or buying office space in an existing building may be safe. Yet for that stand alone building or the field you’re considering, zoning research will be far more important. Local zoning offices often post zoning ordinances online and the staff can also provide information.

Government regulates via permits, so identifying all permits needed for your real estate and for your business is very important. Building permits may be needed for interior and exterior renovations, installation of fire suppression systems and HVAC systems, and not just for erecting a new building. Utility permits may be required, especially if there are special business needs beyond routine utility service. Consider permits for HAZMAT storage, use, and disposal. A Permit To Operate may be required by and issued by a fire marshal. Municipal or state Health Departments often require permits for sewage and well systems, medical equipment like X-ray machines (OSHA permits are also required for these), medical waste handling, and food handling. Unfortunately, a single comprehensive resource listing all permit requirements is elusive. So, there will be some homework to conduct.

State transportation departments are responsible for defining and enforcing various aspects of real estate with transportation consideration.  This can include the placement of drives and aprons, lighting, right of way configurations, restrictions on types of vehicles, and much more.

5. Budget and Financing. This information should be included in your business plan where you prepare your estimated cash flow statement and other documents, and where you define financing and anticipated budget requirements for your whole business. However, that portion reflecting your budget and financing for your real estate should be discernible. For many components of your business, their costs and your budget and financing needs may be relatively easy to identify. For example, the prospective costs for goods, wages, licensing, and other such items can be easy to determine. Real estate on the other hand is more difficult because pricing (i.e., leasing costs and sales prices) can vary greatly. Real estate pricing can vary by location, size, type, material condition, landlord and seller interests, extent of build-out, and much more. A commercial real estate agent can assist with your research into prospective leasing and purchase costs, including additional costs such as closing costs. Also, the cost in readying the property for your business operations will be unknown until you select a specific property. Sometimes the source of financing for real estate will be different such as a different lender and a different type of loan. “Budget” refers to amount of funds needed and for what it will be used. “Financing” refers to funds themselves and sources such as commercial lenders. Ensure you consult with a commercial lender, if needing a loan, to understand qualification requirements and the extent of funds you may be able to receive as early as possible.

6. Lease v. Purchase Analysis. There are advantages and disadvantages between leasing and purchasing real estate. Those advantages and disadvantages can differ for each person based on business needs and personal interests. Consider the following matters, and additional ones you may identify, and define them as either advantageous or disadvantageous as they pertain to you. Some may be neutral (i.e., neither advantageous nor disadvantageous). This is an important exercise in helping a business owner decide whether to lease or purchase real estate.

By owning real estate, the owner:

Has more leeway in configuring the property
May have tax benefits
Can self-initiate renovation/remodeling
Can borrow against equity for funds to invest in the business or other ventures
Can sell the property and collect proceeds
Can use the property as an investment (i.e., should the business move or fail, the property can become a rental property and leased to tenants for the owner to collect income)
The principal balance on the loan is a debt, and a liability on the balance sheet. Yet the property is an asset.
May require up-front costs to purchase such as a down payment and closing costs

By leasing real estate, the tenant:

May still be able to have real estate even when lenders disapprove a loan to purchase
May have less upfront costs than purchasing
May receive services from the landlord (maintenance, security, etc.). Tenant still pays for services as part of the rent payment, though.
May not have tax benefits
May be liable for landlord’s property taxes, insurance, maintenance, and other service expenses
May have less leeway in configuration, signage, build-out
May not have a loan debt
Does not accrue equity
May be disrupted if the landlord sells or otherwise transfers ownership of the property

Should the choice be to lease, identify preference for the type of lease, terms to be included in the lease, and the duration of the lease. There are multiple types of leases – “net” leases are the most common. Occasionally landlords provide gross leases. With a net lease tenants are responsible for costs of items that typically the owner of the property would cover such as taxes, insurance, and maintenance. With a gross lease, more or even all expenses for the property are covered within the rent payment which, of course, will be higher than a net lease rent in order for the landlord to cover those additional expenses. Terms for a lease can delineate which services are provided by either the landlord or tenant, permissible and prohibited uses by the tenant, means and conditions of early termination, and other terms as the parties decide.

7. Insurance.  Consult with insurance providers and determine type and cost of insurance needed, and whether or not you can obtain insurance.  Cost of insurance premiums can vary depending on the factors of the real estate that the insurance provider considers.  Also identify any insurance coverage provided by the landlord.

8. Add additional content that may be important to your real estate plan.