Smart Leasing Tactics

      When you need to rent space for your woodworking shop, favorable lease terms can be a real plus for your business. December 7, 2007

Question
What are you paying for rent? I am in Northeast Ohio. I'm looking to expand and want to know what I should expect in this area.

Forum Responses
(Business and Management Forum)
From contributor L:
$4/ft/yr, triple net, Nebraska. 18' ceilings, 800 AMP 3 phase, 2 loading docks, sprinklers, 4 OHDs, concrete parking, IR heating.



From the original questioner:
What does triple net mean? If you have 2000 square feet, this would be 2000 x 4 divided by 12?


From contributor A:
NE Florida. $750 mo/2000sq ft. 3 phase power, all utilities except electrical included. 15 ft ceilings, forklift to use anytime, full concrete parking.

Only drawback is the body shop and the high performance Mustang place have lots of customers that stop up the parking lot. And they have a Dyno. And loud race cars on the Dyno.



From contributor K:
$3.00/sf per year. Located in Mansfield, Ohio. Have 3 phase power and approximately 6000/sf.


From contributor J:
Triple net or NNN means you have all the costs associated with building ownership without the benefits. By this, I mean that on top of probably paying for his building in 5-8 years in rent, you also pay his property taxes, fire insurance on the building, and all care and maintenance costs for him as well. After all, why should the landlord pay taxes on the property he owns? This was commonplace on office space and retail space. Then somebody got greedy and decided to try to get NNN for warehouse space. And of course someone was dumb enough to fall for it. Unfortunately in my area it is becoming more and more common.

As much as I hate it, you just have to do the math when you make an offer. Never pay asking price. I was stupid enough to do that on my first shop. Landlord said 3.50/sf and I said golly gee wiz, okay. Later found out my neighbors were only paying 1.75.

A landlord buys a building to make money and for income. Go to the courthouse and find out what he paid for it. Divide the cost of the building by the square footage to get his cost per square foot. Then divide the cost per square foot by 8. This gives you your base rental cost per square foot and allows him a 9% annual return. Average is 6-12%. Then you add the NNN on a pro-rata basis to your base rental cost to get a ballpark of what you should pay.

Here's an example:
20,000 square foot building
Paid: $500,000
Taxes: $8000/yr
Insurance: $4000/yr
CAM: $2000/yr
Building cost: 500,000/20,000 $25/sf
$25/8=3.13/sf base rental price
NNN= $1.42/sf 20,000sf/$14000
Total rent per year is $4.55/sf or $7583/month

The above scenario would give the investor a clear 9% rate of return which would double his money in 8 years. On top of that, the building will appreciate at a rate of 9% annually as well.



From contributor L:
Construction costs vary widely due in large part to the local building codes and zoning. I've priced a building and it's cheaper for me to lease (even with the triple net). Around here the city does everything they can to increase your costs. By the time you get all the costs factored in, you're at $40/sq. ft.

So using contributor J's system:
40/8=5.00 base + (taxes here) .77 + misc. maintenance at 1.00. I get to $5.77/ sq. ft./year. Cheaper to lease!



From contributor W:
Currently we're paying $2.62/sq ft/yr ($1047 a month for 4800 sq ft). Includes water and property tax. We pay heat and electric. 11/12 ft ceilings, access to large common loading dock. Third floor with large freight elevator (first floor pretty much doubles the rent, so we opted for cheaper).


From contributor L:
That pretty much limits you on the size of equipment, doesn't it? I can't even picture having to haul stuff up and down an elevator everyday. We did the entire interior on the 11th floor of an office building last year - that was enough!


From contributor W:
We're in Chicago, by the way. We don't need the elevator every day, thankfully, or it would be a problem. I feel sorry for the food wholesalers below us, who load and unload at least two full size semis every week, sometimes more. The freight elevator is about 10x12, so we haven't had too many problems. Had to carry a 22 foot long arbor down the exterior stairs of the tenant's next door once.


From contributor X:
Long Island, NY. I'm paying $600/mo for a 20x25 garage shop. It's a detached building behind some storefronts. 2 garage doors, loft space above the 10' ceilings. That works out to over $14/sq. ft./yr. Not uncommon here on LI.


From contributor S:
No rent - buy a building only!


From contributor M:
I agree on buying a building being the only way to go. But right now I am not in the position to buy one. I am located in Willoughby, Ohio and have a small shop by some standards. It is 1800 sf with about half of the space for woodworking. I pay $600.00 plus gas heat and electricity, 12 foot ceilings, 3 phase power. 1 overhead 10 foot door and front and back man doors. I am located in an industrial park with no main road traffic.


From contributor E:
Been thinking of buying a really big building and renting out space - maybe machine time as well - to startups and mid-sized woodworkers. Maybe make it a co-op... a guild... a school? Seems a lot of people are as fed up with rents and finding a good space as we are. We are looking at rents of $5 - $6.50 sf triple net. The taxes around here (NYC area) are astronomical and going higher. Final prices around $14 sf and up, and that is for over 14k sf - less is considerably more! Worse, it's almost impossible to find a building for sale with less than 40k sf, which we can't use up. Add to that and you need to run all services (electric, dust, etc.), which can run to thousands and become permanent improvements for the landlord!

So, any thoughts on this subject? Can woodworkers actually work in close proximity to one another? Or even together? Share equipment like CNC's?



From contributor O:
You could get 5 or 6 cabinetmakers that could all buy homes in a subdivision, like a cul-de-sac. Have the builder build full basements with 3 phase, etc. You could build a system of underground tunnels so you could all network together... One could be a CNC guy, one could be a wide belt sander guy, one could be the guy who does turnings. Of course this all sounds kind of weird, but there are numerous shops in my area that are much more fantastic than what you might find in an industrial part. Lots of home based CNC shops hiding in plain sight. The way things are going these days, shops are legal but not in industrial parks where the local government can find you, charge you high fees, permits, regulations. You might better invest in real estate that is your home and shop than industrial real estate.


From contributor M:
How would you feel about someone trying to start a woodworking co-op? I think it would be more for the hobbyist and not the pro shops. People could share the big machines.


From contributor L:
The shared equipment idea was tried here by a group of small (1-3 man) operations, but it didn't work out. Equipment maintenance issues, members with poor cash flows... When business was booming, everyone was busy and needed help and more space. When slack time came, two of them quickly went out of business, leaving the others to pick up the extra rent (when they were slack too). Someone would have to take on the roll of landlord, make sure the building payments, taxes, utilities, and maintenance were paid in good times and poor.


From contributor E:
I agree - why I have been contemplating just that. I am a capitalist, not a socialist.

I want a few things from this type of arrangement:
1. Profit. I will rent space, equipment or both, but I make a profit from both.
2. Better gear. I think that I can justify a few upgrades if I am making money on them -like a CNC, et al.
3. A somewhat ready pool of qualified woodworkers to sub work to when needed.

I would also be able to finally purchase a building that I could conceivably grow into indefinitely... Simply take space over through attrition when I need to. Of course if I can hollow out those tunnels enough, I may not need any more space...



From contributor O:
I've tried to network with local cabinetmakers. Some are friends. But the hippie days are over; it's all done with greenbacks. It only works if you pay them money for their time. The tunnel idea came from my UPS driver, who needed more space in his home, so he went down into his basement and spent the entire summer digging out a new large room by hand, hauling the dirt up and out. He had a half basement, now he has a full one. It didn't cost him any money at all. Also, I remember a neighbor when I was a kid that did the same thing under his house. There was nothing more than a crawlspace. He dug it out and built a small hobby cabinet shop. I'll just stick to above ground.


From contributor J:
My very first landlord told me that it would be much cheaper for me to simply pay the "new market price" after my initial lease term was up. The new market price reflected a 70% increase in rent. He was flabbergasted when I told him I got double the square footage for less than I was currently paying! But moving is a big pain. And back then I just had basic small tools like a bandsaw and table saw. Now with CNC's, double end tenoners, clamp carriers, etc... I would never want to move again.


From contributor E:
One of the things I do for woodworking businesses as a consultant is to negotiate leases. My wife manages commercial property for another company, so I crib her notes all the time.

Some lessons I have learned:
1. Never pay the asking price. A figure that is at least 25% lower is a good place to start -and you may actually get that rate. Happens more than you think.

2. Ask for (and you will get) at least 30 days for "buildout" free. It is standard in the industry - though more is easily negotiated. While you are at it, add in the same amount for "removal after termination" of lease.

3. Never negotiate a lease without option clauses... Never! The last contract I negotiated had an initial lease term of 3 years (I recommended 5, but the company owner did not want to commit to that) with three 3 year options. That's a total of 12 years that will be controlled as to increases. I was able to negotiate a 1.5% per option increase - typical max for the industry in NYC area is 3%. This building owner needed to lease fast and wanted a long term tenant. Lease agreements of up to 10 years with up to 20 years of options is not unheard of. Never agree to "market rate" options in a contract - it's a sucker play.

4. Bear in mind when dealing with real estate agents and commercial property these things: It is an open listing - you can and should go directly to the owner if you can. Look the info up at town hall. Typically an agent charges per sf per year (paid monthly) to the owner. The rate varies but can run to several hundred dollars a month - 10 to 20 cents per sf per year or so. This is a reduction you can ask the landlord for. Also, asking for a net net price (not paying the taxes) is perfectly reasonable - you may not get it, but it does not hurt to ask.

5. Do your homework! Ask yourself some important questions: How long has the property been sitting? Are there any environmental issues? What was the last tenant paying? Are there any zoning issues? Neighbor complaints? You get the idea... All in all, if you do your due diligence, you can lease without going bankrupt. Or you can buy.



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