5 steps to take when moving your business
Companies move for many reasons, even when they have a good relationship with their landlord, but the reasons all boil down to optimizing facility operations.
They outgrow their space, or perhaps they’ve sustained restructuring cutbacks and need to downsize in order to save money. With their image in mind, perhaps they want to move up from a tired, aging structure with poor signage to a more modern Class A building with branding opportunities. Or maybe their existing plant isn’t suitable for a new, more efficient manufacturing technique or process. They might have a desire to own versus lease, or their location may not work due to inadequate parking or poor access for clients and staff.
Whatever an organization’s new or emerging reality, pulling the trigger on a move, whether to a shared building or a stand-alone (new or used) facility, is a process that requires due diligence. “Moving is not a decision to make lightly,” said Dennis Sandora, president of The Gialamas Co. “The cost financially and the disruption to business can be major and needs to be planned carefully, but if your space is not being cared for properly, if you are not in the right location for your clients, a move might be well justified.”
Whether you’re building anew or improving existing structures, new space should be designed to fit the image you want to project. Photo courtesy of Gialamas Co.
If you don’t have some type of tenant representation, either from an exclusive tenant representative or a real estate broker that offers the service, you will need to enter into a representation agreement. You will also need an attorney to review the proposed new lease and perhaps review your existing lease in case you don’t fully understand terms that might prevent a move. In the event your new space requires significant tweaking to meet your needs, you’ll need an architect or space planner with designs on the new space.
If you make the move, you should be prepared for a nine- to 12-month relocation process, according to Jeff Jansen, senior advisor for ALTUS Commercial Real Estate. If you happen to be content, check out the commercial real estate market anyway. Plenty of space is available, and lease rates are still favorable for tenants. “Even if somebody likes the space they are in and is considering staying, they should shop and see what’s out there because they might be surprised,” Jansen says. “If they last signed a lease five years ago, a lot of things can change in that time.”
In addition, simply renewing your lease doesn’t mean settling for the status quo. “Many tenants continue to renew their leases without ever considering negotiating new terms or obtaining needed improvements,” noted Aimee Bauman of Key Commercial Real Estate. “Even though a tenant may have an option to renew with predefined terms, the tenant is always able to renegotiate the terms at the time of lease renewal.”
In this look at property management, IB delves into the multistep process involved with relocating a company, from finding the ideal location to the execution of the move.
Step 1: Analyze the situation
Once the decision to move is made, organizations ideally engage in a situational analysis to determine various search requirements: Where do you want to be? What type of property do you want (Class A, B, or C)? What is your price range and budgetary framework? What amenities do employees prefer both inside the office and around the office? Should you lease or buy?
If you need a new office, are you looking for naming rights on the building or other branding opportunities? If you need an industrial property, do you have ceiling requirements? Do you need loading docks or drive-in doors?
For businesses, calculating space requirements is an opportunity to reduce their second-largest fixed cost, Jansen noted. “People are making more efficient use of their space, looking at their facilities, and saying, ‘How much of this square footage is just storing dead files? Why do we have all this old paper? Let’s get rid of the old stuff and be more efficient going forward with how we store things.’”
The better tenant representatives try to put themselves in your shoes, gathering information on matters ranging from the size of your workforce, to your preference for cubicles or private offices, to how many break rooms you need. “Folks in that tenant representation world, we actually put ourselves into the place of that business owner,” explained Mike Herl, partner and vice president of brokerage services for Colliers International. “We get in there to study and understand their business, tour their current location, look at their layout, and understand why they want to move into a different building.”
This first step also requires some organizational input. Companies on the move usually form a two- or three-person relocation committee whose members will be assigned various tasks related to the move and serve as a liaison with the tenant representative.
Step 2: Evaluate the market
The next step is a market review of preferred locations. According to Herl, the review can be as simple as opening a map of Dane County and drawing a circle around where you ideally would like to be, then drawing another circle outside of that circle to identify secondary areas, and then drawing a third circle representing the worst-case scenario — the absolute farthest you will look for a property.
Many factors, especially company culture and other individual characteristics, go into the market analysis. “Startup companies typically are in lower-rent buildings, they need room for expansion, and they need flexibility,” notes Leon Wilkosz, chief operating officer for Vanta Commercial Properties. “More established companies may be in a Class A facility to make sure they have that appearance for their business, so we will look at square footage and we will look at amenities in the area, depending on the type of business it is. Some businesses are more fitness-related in terms of the culture of the workforce, and they want to have workout rooms. They want to have places to park their bikes. They want to have showers. They want to be near bike paths or walking paths.”
Law firms might prefer to be downtown for close proximity to the courts; others prefer outlying areas with more affordable parking for employees. Typically, tenants have a vision of where they want to be located, whether it’s by the Beltline where their branding is visible or along major highways that offer manufacturers convenient access for trucking.
Another part of the market overview is to identify qualified properties within each geographic circle. Tenant reps will arrange tours of the properties that make the cut and then make a short list of properties that have been examined.
What if you can’t find what you’re looking for in the ideal geographic location? At that point, it’s best to “re-up” with your existing landlord until you can find the right space at the right location. Discuss with your landlord the potential of a short-term extension, a month-to-month lease, a future option to terminate your lease renewal with a six-month notice, a termination fee, the ability to sublet, or other flexible lease terms.
“This should not be left to the last minute,” said Bauman, noting that the earlier you know this, the sooner you can pursue options and the better your decision-making will be.
If your landlord will not allow a short-term or otherwise flexible lease-term extension, and you cannot find the ideal new permanent location for your business, you may need to consider an interim relocation with a landlord who will allow that flexibility. “Then you can continue with your search for the ideal permanent solution without making a hasty decision or being stuck in a long lease,” Bauman added.
Step 3: Request proposals
From there, relocation alternatives are thoroughly evaluated. Say the tenant representative finds 10 properties in step two, tours all 10, and based on the criteria provided by the client company, whittles the list down to three. Requests for proposals (RFPs) are written and sent to the landlords of the three finalists, and they typically are given from 10 to 15 days to respond.
“That RFP will include everything this company needs, from freight elevators to loading docks to visibility and naming rights — all the things we have identified as important by working with the [client] company,” Herl said.
The renter can begin comparing the proposals as soon as they’re received, and part of this review is an evaluation of the financial viability of prospective landlords. According to Sandora, this is done to ensure the landlord can provide the improvements promised for the space and has the ability to pay for maintenance and properly care for the property throughout the lease term.
In Sandora’s view, handicapping landlords also involves judging their reputation and flexibility. Does the landlord have a good reputation for providing quality space and services? Can the landlord provide references to validate their abilities? Is the landlord an “investment-only” owner, or is this an owner who runs the property as a business and who builds long-term relationships to ensure success?
The landlord’s reputation for quality service often is overlooked, but telltale signs include whether a property is aesthetically pleasing. Is landscaping attractive and maintained? Is snow removed on a timely basis without affecting safe access to buildings? Are there noticeable safety hazards (exposed wiring, etc.) that haven’t been addressed? What type of condition is the heating, ventilation, and air conditioning (HVAC) system in? Are there plans for future improvements?
“A landlord is responsible for the maintenance and care of the overall property a tenant selects to lease space in,” Sandora stated. “This service can have a tremendous effect on business.”
The tenant representative should have a pretty good idea of who the good and the questionable landlords are. He or she should also know which properties have fallen into trouble, which are now banked-owned, and which are owned by hedge funds that purchased the notes from a bank. Those factors are not necessarily disqualifying, but they do add length to the moving process.
“It just takes a lot longer to go through the process if it is bank-owned or hedge-fund-owned because it takes a lot longer for them to make decisions as to whether this is right for them or not,” Herl explained.
Regarding stand-alone options, Wilkosz says build-to-suit happens when an organization is large enough that it won’t fit on any existing property in the market, or if it simply wants to have a stand-alone building. Most businesses probably won’t build a stand-alone facility, but often it depends on the type of business. “A retailer, a financial advisor, or a cellular phone business might do something small, like a 5,000-square-foot stand-alone,” Wilkosz noted. “Typically, you won’t see an office build-to-suit on anything smaller than 20,000 square feet. It just doesn’t make sense to put that small of a facility up on land and use up land for that.”
Step 4: Negotiate terms and conditions
Based on the proposals received, tenant reps put together a letter of intent requesting a tenant lease from the landlord(s). This layer of review gets into the nitty-gritty of leases, and this is where attorneys get involved with examining lease language so that negotiations can ensue. In addition to lease rates and terms, tenant improvements or build-outs are negotiated, and tenant reps explore the potential for future discounts, including a remodel allowance that kicks in after five years.
Lease negotiations typically take 30 days, and tenants should use part of that time to become fully versed in the details. Failure to fully understand the lease is the most common mistake tenants make. Wilkosz recommends that tenants make a list of their top priorities — things that must be in the lease. Once the lease is written and before you sign it, check to make sure those things are taken care of.
The lease, Wilkosz notes, is the legal document that drives the landlord-tenant relationship, and if it’s not satisfactory to both parties, problems ensue. “If there is one thing that I would say is a problem after we negotiate a lease, it’s that people who haven’t read it will come to us later and say, ‘We talked with our broker about having this item taken care of in our lease, and we’re wondering why it wasn’t,’” he said. “So we go back to the actual lease document and it’s nowhere to be found.”
Tenant requirements are changing as businesses change the way they operate. The importance of daylight, indoor air quality, accessibility, and access to amenities impacts employee productivity and retention, which can have a “very large” effect on the financial success of a business, Sandora stated.
“What used to be standard is not always important to tenants,” he noted. “New paint and carpet used to be a basic standard, but if quality materials were used in a space, the carpet may be fine and a tenant may prefer to have lighting upgraded or walls removed for an open concept for collaboration. Some tenants would prefer a concrete floor and higher security options.”
Step 5: Implement and execute
In this phase, construction drawings and bids are reviewed, contractors are selected by landlords, basic improvements or build-outs are executed, and moving day is arranged. Experienced tenant reps can ensure that construction bids are within reason, and they can also help with tasks such as selecting moving companies and IT vendors and assessing whether existing office furniture is suitable for the new space.
This is often the most time-consuming step because a major reconstruction, or even a remodel, can take from 60 to 90 days. Vendors should work to create a space plan that works for the tenant while keeping the demolition of materials to a minimum to reduce the waste stream and tenant costs, Sandora advised.
According to Bauman, there are several ways to handle funding and perform the build-out improvements required by the tenant. The landlord might lease the space in as-is condition, with the tenant assuming all costs for alterations — the advantage to the tenant being the ability to control his or her own improvements and to negotiate the lowest rent possible, because it shouldn’t include any amortized improvement costs.
In many cases, says Bauman, the landlord will give the tenant a dollar amount per square foot toward the build-out cost. This enables the landlord to know the exact costs for improvements. Those costs can then be factored into the lease rate, and the tenant benefits from the financial assistance from the landlord while maintaining ultimate control over the build-out cost and management.
Another method is when the landlord provides a “turnkey” build-out for the tenant, meaning the landlord is responsible for payment and performance of the entire build-out.
“The rental rate may be higher in this scenario to reflect the amortization of the build-out costs over the lease term,” Bauman noted. “This benefits the tenant by minimizing their upfront costs to ready the space.”
When all is said and done, “we do a walk-through with them, a punch list situation,” Herl said. “We go through and make sure everything is exactly what they thought it would be and sign off on the final paperwork when it comes to the punch list, and they have a new home.”
What’s out there?
Five years after a devastating recession, there are still plenty of options available for companies looking for space, both in office parks like Old Sauk Trails on the west side and the American Center on the east side. Suburban communities like Middleton, Waunakee, Sun Prairie, and Verona also have “lots of dirt,” Herl noted, and they are very anxious to lure businesses.
Meanwhile, the City of Madison has been aggressive in convincing people to buy old, dilapidated buildings, tear them down, and build something new. That adds to the cost, but it’s worth it for people who covet a Madison address.
Madison isn’t the only redevelopment enabler; real estate firms can be, too. “If a property works for you, we can get a developer to come in and buy the existing building, work with you, and build a facility on which you will have a 15- to 20-year lease,” Herl says. “You don’t necessarily have to be the ones who purchase it. That is something we’re doing all the time.”
Oh, Those Lousy Landlords!
They are viewed as the exception rather than the rule, but unsophisticated landlords do exist, and they typically lack the required expertise and savvy to operate in the real estate market.
The smart ones know what they don’t know and hire the services of a property management firm; the others end up hurting themselves and their tenants. That’s why an evaluation of prospective commercial landlords has to be part of the relocation process, or the tenant experience is likely to be disappointing at best.
Sometimes, real estate rookies have new realities thrust upon them, such as when a property is willed to the next generation with no property management experience. While the son or daughter tries to sell the building, it still has to be managed and maintained to attract tenants. Intellectually, they understand that a fuller building is better, but there is a learning curve, especially with regard to tenant improvements.
“A lot of times they don’t understand why they are putting in $50,000 in improvements when the business that will use them, they are just going to move out and he’s going to have to tear it out again,” says Mike Herl, partner and vice president of brokerage services for Colliers International. “And I say, ‘Welcome to the process.’”
In addition, there are landlords who were hit hard by the recession, and they find themselves in a financial situation where they can’t handle all the build-outs. Yet they really need a tenant in their vacant space, so they try to do it on the cheap and usually suffer the consequences of an unhappy tenant.
“It does happen here,” Herl acknowledged. “I’m going to say it’s probably 20% of the overall situation, but it does happen.”
According to Dennis Sandora, president of The Gialamas Co., what separates commercial landlords is their approach to the property they own. Do they look at property as a mere investment, or do they run it as a business and care for it? The long-term impact can be profound on asset values, tenant experience, and success.
“The market can be greatly affected by this type,” Sandora notes, “maybe more so than someone who does not use the services of a broker.”
Click here to sign up for the free IB ezine — your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.