This article was originally published in Smart Business Broward/Palm Beach | June 2008. Interview was conducted by Leslie Stevens-Huffman
What to consider before constructing a new facility or renovating
The idea of moving your business into a brand-new custom building can be tempting. The benefits of a floor plan tailor-made for your business might be worth any additional costs. On the other hand, renovating an existing building might be faster and less expensive, but compromises might be necessary. One thing is certain, both choices have their pluses and minuses, so in order to make the best decision, CEOs should investigate the costs, feasibility and time required for each option because mistakes can be costly. “When you opt for new construction, you need to be certain you’ll be able to get the building permits and land entitlements you’ll need or else the project just won’t happen,” says Michael Scarpino, CCIM and senior director with Prudential CRES Commercial Real Estate in South Florida. Smart Business spoke with Scarpino about what CEOs should know before deciding between building and renovating.
How do entitlements and zoning impact the decision to build or renovate?
There might be fees and zoning issues associated with brand-new construction on vacant land that you won’t face if you opt to purchase and renovate an existing building, simply because the land use is established and the supporting infrastructure is paid for. With new construction, you might be assessed impact fees for the building of roads or sewers, and it might take some time to investigate whether the current zoning will support the proposed construction plan or if you’ll be able to get the necessary entitlements for things like parking. It’s sometimes possible to purchase vacant land that is already platted, meaning the entitlements and land use have been decided, which will save time and money. Sometimes under the right circumstances, new construction is not more expensive than renovation or it’s worth the extra investment to get exactly what you want.
How does location impact the decision?
The location of the property has a huge financial impact, especially long term. If your business needs proximity to rail lines or major highways, that requirement might be the most important decision criteria, and if the land is vacant, you’ll need to know if and when the long-term master area plan provides access to major transportation lines. Also, neighbors may pressure local officials to turn down your plan, if they perceive it will have a negative impact on traffic, community aesthetics or property values. Last, accessibility to a work force with the required skills is a major location consideration because having to pay long-term premiums to commuting workers can eat away at savings gained through an advantageous construction or renovation deal. Both the state of Florida and some local governments offer incentives and tax advantages to businesses that locate within enterprise zones, but only a thorough analysis can determine if this might be the right move for your business.Be wise when you select the location of your CRE investment! Click To Tweet
What’s the time required for each option?
Generally, the escrow and due diligence process required to purchase an existing building takes about 90 days, and then renovation can take anywhere from three months to two years, depending upon the extent of the construction. When building from the ground up, expect a six-month escrow and then six to nine months for construction. If you need to move quickly or during your business’s off-season, do your homework because it’s very costly to move twice or take short-term lease extensions. It’s also important to factor in the costs of production downtime or the options of moving in stages versus all at once. Run a profit and loss statement for every possible scenario, looking at all the impacts and costs, in order to make a sound, unemotional business decision.
How do industry-specific construction requirements factor in?
Build new or renovate decisions are often greatly influenced by the extent of renovations required to retrofit an existing structure. For example, if you company stores dry goods and that necessitates extensive architectural and engineering changes to an existing building in the form of new ceiling heights, ventilation, fire sprinklers and loading docks, you might be better off with new construction. If the previous owner was in a similar industry and the building flows properly, renovation might be more cost-effective.
What should CEOs do to evaluate their options?
The best thing CEOs can do is surround themselves with experienced professionals who will provide honest recommendations and expert advice, not just tell them what they want to hear. Consider a team approach that includes a lawyer, accountant, banker, a real estate professional, the architect and the engineer to help you evaluate your options and navigate the process. Check their references because inexperience can lead to mistakes.