Defining Your Exit Strategy
Are you in the Real Estate Business? You might be in the oilfield business, manufacturing, sales, service, distribution, freight forwarding or any number of other businesses. However, the answer to this question might surprise you. More then likely you are ALSO in the Real Estate business in some form or fashion. Just like with your main trade, every dollar spent should be looked upon as an investment, one that could pay huge dividends if made correctly. As such, it is important to become familiar with your investment to clearly analyz the potential risks, and rewards.
Whether you are leasing, looking to purchase another building, or are in the process of expanding your current facility to accommodate the future growth of your company, one must consider a large number of items before making a final decision. While some of these items are obvious such as functionality, checking for various defects, financing, location, and, of course, price, there are many more to consider which could prove crucial to the success of your investment. One of these items which often goes overlooked is also one of the most important…..The EXIT STRATEGY.
The “Exit Strategy”, as it pertains to a real estate investment, is a simply concept. Basically, it answers the question of how you will be able to get out of your investment safely and, hopefully, with a profit (assuming that the purpose of any business is to make a profit). Additionally, as with other investments, the time that this will occur will play a factor. There are numerous factors which could influence this so it is imperative that you take measures to clearly define your exit strategy BEFORE you make the decision to move forward with an investment in Real Estate.
One of the negatives of investing in Real Estate is the lack of liquidity which means that, in order to pull your cash investment out of the deal, you must find a buyer or a tenant to lease the space providing cash flow. Therefore, you should try to determine the type of business that would occupy the facility. While I would recommend that you consult with a professional, the following are some basic tips to consider:
1.) BIRDS OF A FEATHER: Get familiar with the area and take note of the types of companies that are nearby the site you are considering. Take note of the types of buildings that they occupy and compare them to your site. Often, the buyer/tenant is located just a few doors down so make sure that your building could accommodate their functional needs to some degree. Try to determine the “draw” to the area and make a list of the types of companies that would prefer to be there. For example: If you are located near a major airport, there are more then likely freight forwarders located nearby. They often need dock high loading capability so make sure you are purchasing something with a dock. .
2.) STAY GENERIC: Try to make sure that the building can be used by as many companies as possible. Some features may not be vital to your company operations, yet are important to most others. While you may not need them, trying to save a few bucks now could really limit the number of potential buyer/tenants down the road. For example: Trying to save a few thousand dollars by buying (or building) a facility with a low clear height such as 12 feet would virtually eliminate ANY companies that require a higher ceilings for storage (unless they were willing to raise the roof which could get expensive). Avoid taking a building that is too “specialized” to work for a large number of prospects.
3.) AVOID BANDAIDS: If you have outgrown your current facility, it can be attractive to simply expand onto the existing structure. However, this could prove to be a costly mistake due to the lack of return on the investment. If you were located in an area being “redevelopmed” such as the area inside of Loop 610, the costs of adding onto a structure could be wasted due to the fact that your most likely buyer, a town home builder, has an interest in the dirt beneath the structure. As an alternative, a client of mine used the $150,000 he had previously allocated for the expansion and purchased land in on Beltway 8 where he had planned to move eventually. Within 3 years, the land appraised for $250,000 which was more then enough to make the down payment on the brand new building he built for $2,000,000. The price he received for his old facility would have stayed the same because it was purchased for the land value only, and demolished shortly after closing.
4.) DON’T GET LAND LOCKED, LOCK IT UP INSTEAD: Have you ever noticed that new developments usually have a similar amounts of land with them? This is, actually, somewhat of a science. Most costs (per square foot) can be drastically affected by the ration of land to building. W
5.) REMAIN VERSATILE: If you can operate effectively in 2 adjacent buildings, you would increase your range of potential buyers/tenants by taking smaller buildings. For example: A client of mine needed 25,000sf of building but didn’t mind occupying two structures which were 13,000sf each. A year after he purchased them his company went thru a drastic expansion and landed a huge number of new accounts. He doubled in size so he was forced to acquire a much larger site. By marketing the buildings separately, we were able to sell them in half the time it would have taken had he opted to purchase a single 25,000sf building. Conversly, if times were tough, the costs of downsizing would be significantly lower and moving would not be necessary since you would just sell/lease one of the facilities.
6.) MIMIC YOUR COMPETITION: You know your competition better then anyone so use it to your advantage. If your exit strategy with your business would include selling out to a larger competitor, try to make your facility as similar as possible. Do some research and lay out your facility in a similar fashion and make sure that your building has similar characteristics. Another client of mine took this approach and sold his company for a nice profit. In addition, the facility worked so well for them that they signed a 25 year lease which pays out a handsome monthly rent which only requires a short walk to his mailbox each month. Basically, MAKE IT EASY ON THEM to stay put and you will reap the rewards.