The commercial real estate development deals that make headlines involve big-money contracts, large tracts of land and heavyweight players. It’s easy for small businesses to assume the game is too big for them to play.
Choosing a commercial real estate developer
For some, it is. Some small businesses might not find developing and owning a build-to-suit headquarters very cost-effective; buildings with square footage between 5,000 and 10,000 often bear similar construction costs and architecture fees as larger projects. And for fast-growing small businesses, such a move is downright counterintuitive: why lock into a site that can’t grow out as the business grows up?
But small-business owners who think they can’t get any attention because they aren’t ideal development clients are wrong, say real estate professionals.
Especially nowadays, in a somewhat soft real estate market, developers are taking on projects that are smaller than they usually do, says Kay Harris, principal with KayHarris Real Estate Consultants in St. Louis Park, a firm that assists clients in site or facility developments, or in the redevelopment or rehabilitation of existing facilities.
“They’re hungry for work,” she says.
Complex tasks
Hungry, yes, but sometimes not compatible, says Kevin Brink, senior vice president of investment sales at Welsh Cos. of Bloomington. Choosing a developer that specializes in the size suitable to a small business’s needs is wise. Developers who mostly churn out big projects can probably do the job, but if something is not their mainstay they might not be as efficient. They also might not be as cost-competitive.
Picking small works well in many other industries — small businesses often fare well with small community banks, for example — but that might not be the case in real estate development. Some small development firms do great work, but can’t accommodate the complex tasks involved with getting a proposal off the ground.
Full-service developers, say real estate professionals, can finagle with banks, communicate with other contractors such as architects and engineering, acquire land, manage the construction process and work the ropes with government officials — stuff small businesses can’t do on their own.
Another alternative is to hire a real estate consultant who can act as an intermediary with a developer and other project players.
Assigning someone to be a so-called project manager in-house can otherwise drain a small business’s resources, says Harris. “You need to step away from your business, and usually you don’t have the staff to do that,” she says. However, it’s important to have one point-person representing the company who can be called on. That role is usually filled by a high-ranking company officer, such as the CEO or CFO, says Harris.
Once a small-business owner has narrowed down a list of compatible developers, the next step is to evaluate each firm’s reputation, says Dale Glowa, senior vice president of development at Bloomington-based United Properties. Getting some references is a good idea. His firm, for example, offers a list of references and past customers to potential clients. Other real estate professionals, such as brokers, might also have some solid suggestions.
Experience is another criterion to consider among potential developers. Both Brink and Glowa recommend choosing a firm that has developed the product-type in which the small business is interested, whether it is an office, industrial, retail, or medical building.
“We can’t all be experts at everything,” says Glowa.
A development firm whose staff is available and listens to a small business’s goals is paramount, says Harris. “It’s about putting clients first instead of stuffing a solution down their throats,” she says.
Some developers may suggest ideas beyond a small business’s build-to-suit and ownership vision, which may not be the best option. Office or industrial condominiums, in which occupants share ownership of a building and pay association dues, are becoming popular. Or, many small businesses build and own a headquarters building, but then rent out part of it to other companies, says Brink.
Adding a revenue stream in such a scenario can mitigate the debt a small business may incur from building and owning a property. And if that small business predicts it will need a larger space in upcoming years, it can negotiate a short-term lease, such as between three to five years, with other tenants to ensure it has room to spill into if necessary, says Brink.
He adds one caveat, however: Building a highly specialized building, or in obscure, off-the-beaten-path locales, will drain one’s pool of prospective renters. You need to ask, “what’s my universe of tenants going to be?” says Brink. A medical building based in Elk River or a building with super-high ceilings and atriums might not attract many interested parties, he says.
A worthwhile investment?
What seems like a win-win situation, however, has its drawbacks. Businesses that own buildings are accountable for upkeep and maintenance. Ownership means “you’re in the real estate business — you’re in the game,” says Brink.
Some developers, including Scott Tankenoff , principal of Hillcrest Development in Minneapolis, say small businesses should take a hard look at whether that’s a worthwhile responsibility and investment. “Why lock into that asset? Stick to your core capacity. You’re in business to make money in your product or your service,” he says.
Take time to choose a developer, but also consider the timeline involved with developing a building. The whole process can be a long one, and can hit snags. When Loren Butterfield, co-owner of AllWeather Roof, launched plans for a new headquarters building in 1998, he didn’t realize it would be five years before the ribbon-cutting would take place.
Butterfield chose to develop on a piece of contaminated land off the Highway 55 corridor in Minneapolis. The extent of the pollution was only realized when a backhoe uncovered pipes, large pieces of concrete, and chemically treated building components. While most of the tab was picked up by public organizations, such as the MCDA, the time that elapsed was excruciating for Butterfield. His business had grown substantially since 1998, and his employees, who had multiplied, were squished in the old space.
For the majority of development projects, meetings are the reason why the process can drag on, says Harris. There are zoning committee meetings, city council meetings, weekly progress-report meetings, etc.
“It can be very involving in that way,” says Harris.
Where you develop a project also can have a huge impact on the length of the process. Contaminated sites, such as Butterfield’s and brownfields, require a lot of environmental attention. And as development gets pushed out into smaller towns such as Medina, St. Michael, Long Lake and Medicine Lake, those city councils might not meet regularly.
Some city halls lack permanent staffs; Harris knows of some city offices that consist of just an answering machine. Getting face time with city officials, who have the power to greenlight a project and sometimes offer generous tax incentives, can be challenging in these cases.
Kevin Brink, Welsh Cos.: 952.897.7700; kbrink@welshco.com; www.welshco.com. Dale Glowa, United Properties: 952.831.1000; dglowa@uproperties.com; www.uproperties.com. Kay Harris, KayHarris Real Estate Consultants: 952.915.4444; kayharris@mn.rr.com; www.kayharrisre.com. Scott Tankenhoff, Hillcrest Development: 612.371.0123; scott@hillcrestdevelopment; www.hillcrestdevelopment.com.
