CUJ Reader Question #2

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What are the pros and cons of building more space than is needed and then leasing out that space to other tenants? What has been your experience with this?

Gene Lock, Design Build Concepts, Atlanta

While building a larger facility requires a greater initial investment, the cost per square foot decreases as the size of the building increases, and it is generally more cost effective to build at today's prices than tomorrow's prices. Leasing out space can also help offset the cost of the initial investment.

In addition, by choosing tenants related to banking, such as insurance companies or financial service providers, a CU could create a one-stop shop for all of its members' financial needs.

The most obvious disadvantage of building a larger facility is that it requires a greater upfront financial investment. Larger buildings require more parking, which results in higher site costs. While tenants can help alleviate the cost burden, finding tenants to lease the space can sometimes be a challenge.

Another challenge is defining terms of the lease to best meet your long-term growth plans. A short-term lease might be better for your credit union so you can occupy the additional space as you grow, but it could be more difficult to find tenants for a short-term lease. If you agree to a long-term lease, you will not be able to take advantage of the additional space until the lease is over, which could be several years.

With leasing, there are also other considerations. For example, will you build mechanical, electrical and plumbing services into the terms of the lease or will it operate as a separate service? Security is another concern. You could expose your credit union to more risks in regards to keeping doors and windows locked, etc. In addition, the tenants may have different operating hours, and may require a separate entrance.

Before committing to a large building, I encourage credit unions to first examine their long-term growth plans and overall business objectives. Circumstances down the road, such as the construction of a new highway or bypass, may require you to add additional retail outlets in another part of town rather than growing your services at an existing location. In addition, building a larger building now is less disruptive to your operations and will allow your credit union to occupy expansion space more quickly than if you went through the planning and construction phases a second time.

Cynthia Grow, DEI, Inc., Cincinnati

Premier Members, now called Centennial Lending, and DEI built a facility where they did have additional space to lease out. The credit union was designed to be located in the central part of the building allowing for future expansion on either side of the credit union. Mark Bostwick of Centennial Lending believes that this arrangement works well, as it offers them additional flexibility for growth. Their lease agreement is arranged to allow the credit union to expand in the adjacent space should they decide not to renew the existing tenant's agreement.

Centennial Lending believes that it saves the cost and hassle of having to relocate in the future. If a credit union is able to afford to build the additional space, Centennial Lending feels it is definitely beneficial for the overall good of the credit union's interest and membership.

Ralph La Macchia, La Macchia Group, LLC, Waukesha, Wis.

Our response is based partly on your real estate market. First of all, what is office space renting for in your area and secondly, how much available excess space is there and what is the quality of that space? Is it on the first floor with outside access? Is it in the lower level (basement) or on the second floor? Is it adjacent to your lobby?

Your cost to build rentable space will vary based on your design and your future needs. If you are in an area where you could attract more retail-oriented tenants, the space could provide a higher value and rental to your credit union and prospective tenants. A good, local commercial broker should be able to help you meet your full potential in this area. You will not save money by doing it yourself unless you are very in tune with the market.

The right tenant can lower your cost of occupancy and attract more potential members to your site. Over the past 18 years I have worked with many customers who have successfully built and leased additional space and have ultimately grown to take the space over for their own use.

One of the cons of building additional space upfront is you are now a landlord, which can bring a host of challenges and, based once again on the type and configuration of the space, you may need to deal with everything from parking, to trash, to noise complaints.

Finding the perfect tenant is not always simple either. A restaurant or sub sandwich shop may draw people into the building but the smell of breads, meat and produce may not be appealing to all of your members, especially at 9 a.m.

The same is true of the noisy delivery truck that arrives every day at 7 a.m. Just because a prospective tenant is a great draw for the site, doesn't mean they are necessarily a good fit for your credit union.

Signage, employee parking, and hours of operation, combined with who builds out the space, are all issues that will have to be addressed. Reserving the right to review and approve the plans and finishes, as well as the contractors and hours of construction, is essential when writing the terms of a lease. This is important because of possible construction delays and potential liens against the space within your building.

The bottom line is it is a good idea to build extra space if your credit union can afford it and you can take the necessary steps to evaluate, implement and control the results.

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