Strategies for Start-Ups
Gain big business opportunities with small companies.
he start-up business client that Steve Marcusse,
CCIM, industrial adviser with Grubb & Ellis/Paramount in Grand Rapids,
Mich., took on last year had very specific space needs: a 17,550-square-foot
property with eight firetruck-size drive-in garage doors located near the
center of town. The problem was the company didn't know how or where to find
such a facility.
The firetruck maintenance and repair company came to Marcusse for
assistance around Labor Day of last year with a goal of beginning operation in
-October. Marcusse quickly located a suitable site. After the clients saw
the prop-erty, they felt confident it was ideal for their needs, but they were
unable to come up with the funds to purchase it. "They wanted to own it
and they tried to get
financing, which slowed the process down by about three weeks,"
Marcusse says. The company faced a hurdle that plagues many start-ups:
"They could get loans for their business but not for the real
Marcusse's situation illustrates two of the most common problems
commercial real estate professionals experience when dealing with small
businesses: unrealistic time frames and lack of capital. But overcoming such
obstacles is just part of the challenge of working with this burgeoning client
While this company's space needs were unique, there are millions of
small businesses in similar situations throughout the United States. In 2004,
99.9 percent of approximately 24.7 million U.S. businesses had fewer than 500
employees, qualifying as small businesses, according to estimates from the
Small Business Administration's Office of Advocacy. And these businesses are growing
quickly in number and size. Small businesses have provided between 60 percent
and 80 percent of net new jobs in the United States per year during the last
decade and represent 99.7 percent of all U.S. employers, according to the SBA.
In December of last year, 50 percent of small businesses planned to hire one or
more employees and 63 percent planned to spend capital on new equipment,
expansions, or vehicles, according to the National Federation of Independent
This growing sector presents numerous new business opportunities for
CCIMs. Small-business owners only face decisions about space needs once every
three to 10 years, says Barton C. Miller, CCIM, owner of Barton Miller
Commercial Real Estate in San Francisco. This lack of experience and market
knowledge means that small-business owners need as much guidance as possible
from commercial real estate professionals when making their property decision.
Commercial real estate pros generally agree that the best way to find
small and start-up businesses is through networking. Marcusse found the
firetruck maintenance and repair company through a contact's cousin, who was
the business owner. "You have to network throughout your whole sphere of
influence. Be specific about what you do. If you are at a party and someone
asks 'What do you do?,' and you answer 'Real estate,' nobody takes note. If you
say, 'I help industrial users find the perfect space' that triggers ideas in
peoples' heads," which is precisely where the next small-business concept
Once the client and commercial real estate pro make a business
connection, they face working through one of the most important decisions the
small-business owner will make: whether to rent or own property. "We
perform a comprehensive needs analysis; we clearly communicate with owners,
sellers, builders, and others involved. We take the different real estate
options and do a lease vs. buy vs. build analysis," says Jeremy G. Woods,
CCIM, SIOR, senior director of industrial services at Summit Realty Group in
Indianapolis. While full-scale lease-or-buy analyses are complicated and
detailed, there are some preliminary steps commercial real estate professionals
can take with clients.
"Buying too big of a building or leasing too much space for too
long of a term has been the death of many small businesses," Woods says.
"This is constantly on my mind when working with these clients."
But the decision to lease or own cannot be made until the business'
stage of development is determined, Miller says. "It is important to show
the net present value using the tenant's criteria, not yours," he says.
"Strategy is driven mostly by whether the tenant is in a growth phase,
characterized by expansion options and/or a relatively short-term lease, or a
mature phase, characterized by a long-term lease and possible candidacy for
owning," he says.
Sometimes it's not much of a choice. When Marcusse's firetruck
maintenance client couldn't get financing to buy its own property, he located
an investor to buy and operate the property. "It turned out to be a good
fit. We wrote a long-term lease with a purchase option in three years," he
Getting Directly Involved
Knowing that it can be hard to locate properties that offer the
flexibility and options that small businesses need, some CCIMs build their own
properties to lease or sell to these companies. Jeffery J. Mocho, CCIM,
co-owner of Los Mochos' Realty in Albuquerque, N.M., and his partners build
office/warehouse condominiums for their small-business clients to purchase in
the Albuquerque and El Paso, Texas, markets. "We build 12,000-sf to
30,000-sf buildings, which are divided into 2,250-sf spaces available for sale.
In the past seven years, we have built 11 buildings that contain a total of 101
units for sale and a total of 218,250 square feet. All of these spaces were
sold or are being sold to small businesses," Mocho says.
If the businesses outgrow the units they bought, Mocho and his
colleagues offer a convenient solution. "Many of our buyers have come back
to us in need of more space and we buy back their old space at the current
market rate and allow them to use the equity and appreciation toward their new,
larger space in one of our new buildings," he explains.
While condominiums are a good option for some small companies, others
might find that building their own property seems like the best choice, Woods
says. "[Some small businesses] tend to want to leave a legacy. They want
to construct a facility that will perhaps turn into an investment for a son,
daughter, or grandchild."
While buying or building potentially can provide future security for a
small business, leasing has advantages as well. Renting rather than owning a
property allows small businesses more flexibility as they grow. "[Small-business
owners] are entrepreneurs who always have visions of growth. The challenge is
finding space, negotiating
a lease, and finding a building that has
expansion [capabilities] and that can accommodate their vision,"
says Frederick P.
Petrella, CCIM, president of Connecticut Realty Group LLC in New Haven,
When the right rental space has been located, more choices need to be
made regarding the lease type and terms. "More often than in the case of
larger companies, small-business owners want endless expansion, renewal, and
relocation rights," Woods says.
"Many start-up companies are fairly conservative with leasing
space," says Jeffrey Hulett, CCIM, a tenant representative at DHC
Associates in Cleveland. "This is due to a certain degree of financial
uncertainty and growth plans. This means it is important to negotiate for
expansion [options] and contraction clauses in the leases."
Another option, which can be espe-cially beneficial for start-up
businesses, are step-up leases. "The tenant pays a lower amount of rent in
the first portion of the lease with the rent increasing over the latter portion
of the lease. This helps keep the initial costs low, helping with potential
cash flow issues," Hulett says.
It is important to consider small businesses' long-term goals as well,
says James J. Piro, CCIM, owner of Piro & Associates in Sarasota, Fla.
"The most crucial point for survival that I have been telling my
small-business clients over the past 10 years is to know what rent they will
pay in future years," Piro says. Sometimes rental rates rise above what
tenants can afford to pay and companies that once had been thriving are forced
to close down, he says. "When preparing a financial analysis, carry the
holding period throughout the future of the business. This way they can
establish a safeguard in the property that houses the business. When they
decide to sell or close the business, the property can provide a nice return on
the investment and a pension for their later years."
Working with an expanding small business varies significantly from
working with a large corporation or business. "The decision maker is
typically the owner and the broker must expect and be able to educate the
owner," Miller says. In contrast to working with a corporation's director
of real estate, working with a business owner is a much more hands-on process,
"In many ways the stakes are higher because the owner is looking
you in the eye and trusting you with his or her future," Woods says.
"This is their pride and their livelihood; every dollar is meaningful and
therefore I find myself going the extra mile for these clients."
Realizing the high risks that small businesses face and addressing their
needs accordingly pays off in the end. "Over the years I have dealt with
many small companies and in a lot of cases they have expanded. I always have
tried to maintain contact with them ... after any business transaction and have
been rewarded by their repeat business and - equally important - by their referrals
to others in need of my services," says Steve Stephens, CCIM, SIOR,
broker/owner of Stephens Commercial Real Estate in Aurora, Ill.
In addition to the new business that can be gained through referrals,
commercial real estate pros enjoy another perk. "It is quite rewarding to
see people who were working - in many cases - out of their homes or garages,
making the big jump into their own space," Mocho says.