For many, the dream of owning real estate began to fade over the last few years. With depressed values, impossible credit standards and a distaste for real estate in general, sometimes a perception exists that investing in real estate is not a wise choice. With the right structure, nothing could be further from the truth. In fact, those forgoing ownership could be sacrificing significant equity in their investment portfolio over the long term.
To illustrate, compare the cost of leasing a 5,800-square-foot office with the cost of owning a similar space, making the following assumptions:
• Market-comparable lease rate at $20 per square foot
• Building value of $1.42 million (about $245 per square foot)
• Interest rate of 5.5 percent
After one year, the lessee’s net expenses after tax deductions amount to roughly $90,000. A comparable property owner taking advantage of tax deductions, depreciation and accounting for paid principal demonstrates a net expense of about $51,000. If those assumptions are extrapolated over a 10-year term with an annual appreciation of 3 percent, the owner realizes a cash savings of nearly $970,000!
Note that lenders are in much stronger capital positions and ready to put capital to use by rebuilding their commercial portfolios, with owner-user deals being the most attractive. Banks are pursuing owner-occupied opportunities that benefit well-qualified borrowers. Interest rates remain at historic lows.
As a result of the soft market conditions, there is excellent value to be found throughout all sectors of the development community. Reduced land costs, aggressive pricing from design professionals/consultants and competitive construction costs combined with the financing benefits listed above create an environment that offers office lessees the opportunity to consider ownership at lower real costs to their business.
A build-to-suit option provides the unique opportunity to craft space to specifically meet your needs. Potential benefits:
• Control over the property, no landlord.
• Creating a new spatial layout allows space to be built to operational needs, more easily defining rooms, amenities, location and flow.
• Specification of materials and systems that meet the quality, security and reliability goals of the business.
• Definition of interior design elements that fit the business’ tastes and presentation preference.
• Stability: No third-party landlord means the business is immune to volatility in future lease renewal negotiations.
When assessing the option of owning versus leasing, the following should be considered:
• Long-term planning goals of the principals — the personal benefit of building equity in an asset.
• The appreciable value of the office building — the location, the quality of the premises and the submarket.
• The ongoing cost of ownership — maintenance and financing obligations.
Once the parameters are set, a highly qualified team of professionals must be engaged who can manage the myriad of details necessary to bring a development project to fruition. For the uninitiated, many of these issues can be somewhat daunting. Getting it right with proper site selection/due diligence, land planning and an understanding of the total development costs will set the course for a success. Once these issues are understood, the process of obtaining land-use approvals, completing design, financing and construction can begin. Your development team members must navigate you through the process and help you avoid the pitfalls that exist at every turn. With a skilled team, you can be confident that your interests are being looked after while the process is kept moving forward.
When done right, there are few better long-term investments for yourself, your business and your retirement. There is one more added benefit: walking in your front door every morning knowing that it is just that, yours.
David Lamm is a graduate architect from the University of Florida with more than 25 years of construction experience, and has served as chairman of Lamm & Company Partners since he founded the company in June 1991. Lamm’s offices are in Baldwin Park. Call 407-895-2525, email [email protected] or visit lammco.com for more information.