Brokerage

Strategies for Start-Ups

Gain big business opportunities with small companies.

T 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 mid -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 estate."

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 base.

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 Business.

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.

Making Decisions

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 might be.

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 says.

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."

Negotiating Leases

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, Conn.

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."

Raising Stakes

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, he says.

"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.

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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