Taking a business from an idea to a thriving corporation is exciting and rewarding, but not easy. In addition to the issues that must be balanced every day, the company’s home evolves as well. Today, a commercial real estate expert, an insurance professional and a very successful local company weigh in on what happens in the real estate world as your business grows up.
NAI Commercial is a full service commercial real estate brokerage in Edmonton, and a member office of NAI Global with more the 400 offices worldwide. Chad Snow, president and broker, says, “When an entrepreneur is ready to step into a commercial lease, their budget and the length of commitment is top of mind. Going from a mobile office or home to a fixed commercial space is typically based on growing needs, such as employees collaborating together, or client meetings.
“For an office-based business, the location can vary from strictly function and budget focused, or it can include marketing-based decisions, such as projecting professionalism or attracting staff.
“The type of staff you employ or the clients you have coming to the location can play a big role, too. Is access to mass transit important? Is ease of parking or access to elevators a must? A discussion of your business needs with a commercial broker will quickly clear up what type of property you should consider.”
A choice must also be made between owing and leasing.
“There are many benefits to both leasing and buying, dependant on the business circumstance,” Snow notes. “Once a business is stable and not likely to grow erratically for the foreseeable future, buying can typically provide the most benefit. However, sometimes the right location is not available for sale and the right decision is lease-based. Alternatively, a newer business may use too much of its capital buying and improving a building rather than keeping that capital invested in the business itself.
“Rental rates vary greatly from property to property, given their features and the total supply in the market. Rents can range currently from second floor walk-up office buildings in semi-industrial areas in the $14-$16/per square foot all-inclusive range, to a brand new office with grand views in the downtown core, underground heated parking and high speed elevators with rates in the $40-$50/ per square foot all-inclusive range. What rate is reasonable is based on the perspective of what the space provides for that business.”
Once a company has been successful in business for a number of years, it’s time to start thinking long-term, in terms of real estate.
“An established business can start considering long-term decisions and the effect on the value of their real estate,” says Snow. “What is the trend in rates? Should I be locking in long-term now and take advantage of lower rates over a longer period of time, similar to locking in a mortgage rate? Should I make the move to owning as I now have the ability to buy the right sized property? Many business owners do well in their retirement from the real estate assets they built through their businesses’ operations. Ultimately, the discussion with a commercial broker can unlock these long-term goals and how best to maximize the value of their real estate.”
With each move, a growing business must consider how to protect the company’s home, as Rob George, vice president commercial sales, Drayden Insurance Ltd., explains.
“The biggest difference from leased space versus owned space is the requirement to insure the physical building you occupy, but general liability is always required, regardless of the size, location or operations of the business; it provides bodily injury and property damage coverage to a third party in the event you are deemed to be negligent from an insured peril.”
Are property and contents insurance policies mandatory?
“No,” answers George. “Typically, a lease agreement or contract will require a certain level of general liability coverage, but will not have a property requirement. The property coverage may depend on your own risk tolerance and your exposures.”
Regardless of the company’s size, some key coverages should be in place.
“Liability insurance, property coverage (includes building, equipment, stock and tenant’s improvements if leased), business interruption and crime coverage are the components you should have on your commercial insurance policy,” notes George. “Other coverages, such as sewer back-up and flooding, are also increasingly important.
“One of the biggest areas of concern is often the limits of insurance that a company carries. For example, $20,000 in property coverage may have been adequate when the business first started, but since then, the business has expanded, bought new equipment, increased stock, etc., but it hasn’t reviewed the property limit to ensure they are adequately covered.
“As businesses grow, our brokers do on-site visits to review the growing company’s needs to educate and ensure we are reviewing all possible exposures. It is very rewarding to see some of our clients grow from a start-up business to a large scale operation.”
AltaPro, an Edmonton success story and a leader in the electrical design-build industry, has experienced every stage of growth, from a home-run business to a large, thriving corporation.
“We started with renting a unit to store materials and an office at home,” say company co-founders Bert and Jeanette DeBruin. “Then when we outgrew that and signed our first lease in the west end, which was 950 square feet.”
From there, growth was steady. AltaPro grew from 950 square feet and a handful of staff and contractors to their fourth (and current) 12,500 square foot location that includes a yard, houses a staff of 118 and up to 20 general contractors – all within 15 years.
“What drove the need for larger spaces was more office space as we added estimators and a project manager,” say the DeBruins. “As we moved to bulk buying materials to save on costs, we also needed more storage. The changes included larger overhead costs that were directly related to growing the business, but the increased sales easily handled these extra costs.
“There was also a need for indoor warehouse space to assemble project materials and keep the materials secure and away from the extreme winter temperatures. As we grew, we also needed more yard space to park and store lifts, larger tools, small equipment, excavation equipment and extra vehicles.
“Our maintenance department was growing fast, which created additional office positions, requiring more and more desk space. As sales continued to rise, so did the need for a project manager and additional estimators.”
For Alta Pro, knowing when to make a move was always part of the management strategy.
“It depends on your sustainability plan and continued business goals,” say the DeBruins. “Perfect timing is if the proposed and planned sales paired with profit is on track. What we can say in hindsight is that you cannot predict the future; however, you can make the best decisions working the math and evaluating your current space to see if it meets your needs. Your relationship with your landlord is important, as it with other tenants.”
What is DeBruins’ advice for other entrepreneurs wondering if now is the right time to make a move?
“Produce a spread sheet of the pros and cons and assign dollar values. Be very realistic. Realize there are many costs to moving, from changing stationary to new phone systems, to new office furniture, to all the other obvious costs. It is a big deal to move, so really make sure you ask yourself: ‘can I afford this or will I scrape by? Can my current landlord make any changes so I can be more content within my current space? Is it a need or a want?’ Make sure you know what the estimated property tax bill has been for the last couple of years and ask about typical occupancy costs in the area.”
They closes with advice that is prudent for all aspects of business ownership, especially when it comes to commercial real estate: “Be prepared for the risk.”