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Dear Small Biz Adviser
My wife and I have a small rehab business
together -- she does occupational therapy and I do speech therapy.
We want to have someone build an office for us on their property.
We would own the building -- or our portion of it. We need about
2,200 square feet.
The estimates we have are that
building it would be about $125 per square foot, or about $250,000
with build-outs.
I have four questions:
- How can we negotiate to lower the price per
square foot?
- We have about $150,000 in equity in our
home and property, plus another $35,000 in savings. Can we use
this as leverage with a bank to lower the down payment?
- If a Realtor/developer recommends a bank
that he uses, would we possibly get a discount in the rate if
we use that bank?
- If we build and lease back to the company,
is there a standard markup people use when setting the rate for
leasing it out?
Thanks for your time.
-- Mike
Dear Mike:
The art of negotiation is just that -- an art. You will need
to do homework and identify the best manner in which to approach
and seek an agreement that equally benefits both parties. You must
create a "win-win" solution.
Sit down with a legal pad and begin by identifying
the points on which there is total agreement between you and the
Realtor/developer. When you attempt to negotiate a better deal,
begin by noting those points of agreement. You want to establish
a positive, proactive atmosphere.
Then list those points of disagreement. For
each point of disagreement, note what you want and what the other
individual wants. Determine how far along that continuum of difference
you are willing to go, and choose it as your ultimate goal.
Do this with each of the "sticking points."
There are several other factors to consider
in negotiations, such as demeanor, body language and agendas. But
those are topics beyond the scope of this column.
Equity and savings
Regarding your equity and savings, I can tell you that real
estate as collateral and cash contributions toward the project are
favorites of any commercial lender. But I cannot tell you to do
this or how much cash and collateral value to direct toward the
project. It will require you to analyze your personal financial
statement for the impact on your net worth, increased level of exposure
to liabilities, and whether the cash flow from the business will
be sufficient to meet your personal financial needs.
However, a sound personal financial statement,
high level of equity and the better the appraised value of the property
offered up for collateral will dramatically increase the likelihood
of funding and lower the down payment requested.
Bonding with a bank
It is most common for developers to maintain a loyal bond with
one or more specific banking institutions. It is the classic case
of, "You scratch my back, and I'll scratch yours." It is legal,
and quite often results in the buyer (you) getting a good deal on
the terms for construction and real estate loans.
However, consider your alternatives. Have you
approached your own bank? Is the Realtor/developer willing to sell
without constructing the building?
Remember that Realtor/developers gain from both
the sale of property and the construction of the building. However,
you have suggested a scenario that is not very common. The Realtor/developer
is selling you a building, but continues to own the land on which
it will sit.
Lease rates, generally, are determined by the
going rate in the specific geographic region. For example, the construction
cost of a building may be the same whether it is downtown or in
a suburban area, but what is the vacancy rate? What is the going
rate at this time in that area for a building of similar amenities?
Determine that and then plug it into a cash
flow analysis to see if you can afford to charge more or less. I
have seen developers who can afford to build when vacancy rates
were high, but construction costs were low. The developer deducts
construction costs from present corporate income, lowers corporate
tax exposure and then increases earnings when vacancy rates decline
and lease rates rise. They win now and later.
Looking for leverage
Mike, you appear to be entering into a deal that cries out for
a joint venture. You may have some leverage in negotiating this
deal.
First, though, do some homework.
- Find out if your bank is willing to make
a better offer. If the Realtor/developer wants to make this deal
with you, then discuss the possibility of approaching another
bank for better terms. Monitor the developer's response. It just
may tell you whether better terms can be found.
- Contact the nearest Realtor's association.
They always have data on the market rates for commercial space
in your area.
Furthermore, I see an advantage for you in how
much you will lease space back to the developer. If your cash flow
analysis is done properly, you may learn how much you can lower
leaseback terms to this real estate agent or developer.
That is leverage, and you may be able to use
it when attempting to negotiate a lower build-out rate. You lower
the developer's profit margin on the front end (construction), but
lower his operating costs on the back end (leasing office space).
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: Dec. 1, 1999
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