Franke Corporate Headquarters and Distribution Center, Smyrna, Tennessee.
© 2009 JIM ROOF CREATIVE INC.
In addition to design and construction of buildings, industrial development involves site planning, subdivision design and platting, and the construction of utilities and internal streets. Consideration must be given to access, parking, building design, and landscaping. In recent years, green building practices have become increasingly important in the development, design, and construction of industrial facilities, and understanding this process is becoming a prerequisite for a successful project.
Beginning developers may start out with a building for lease or a site that is suitable for one or more industrial users. If a build-to-suit tenant or buyer has not been pinned down, they might proceed with a speculative building that can be leased or sold in the future. Depending on market conditions, more profit can potentially be made on a speculative building than on a build-to-suit project because negotiations over lease terms with a potential major tenant can be tough. Speculative buildings are much harder to get financed, however. Construction lenders typically will not proceed unless the developer has deep pockets, with other collateral available, and is willing to sign personally on the loan. The economic difficulties generated by the Great Recession have made it more difficult for the small independent industrial developer to get access to capital.
Consolidation of small industrial developers has been occurring, along with a higher degree of specialization, and small developers are occupying niches that large companies are unable or unwilling to fill, in some cases, playing a support or supplementary role to larger firms. Beginning industrial developers should be wary of some possible pitfalls:
• paying too much for land or capital;
• underestimating the amount of competition;
• building the wrong product for the market, which can usually be avoided by involving the right consultants in the development process from the beginning;
• using an architect who has no experience in the type of product being designed; developers should find someone who knows the local market; can provide a market-oriented, functional design; and knows how to maximize its flexibility; and
• not properly engaging local stakeholders in the entitlement process.
Business parks offer developers the flexibility to sell unimproved land parcels or completed buildings. Generally, they are completed in phases, which helps minimize risks associated with changing market conditions. Today’s business parks are the product of an evolutionary process that had its antecedents in the manufacturing-oriented industrial estates and parks of the late 19th and early 20th centuries.
The first business parks appeared in the 1950s and were focused on office rather than industrial uses. The 1960s saw the advent of specialized R&D parks that benefited from links between universities and business. These settings combined a variety of functions, from offices to laboratory research to light manufacturing. Light industrial uses, such as manufacturing and warehouse/distribution facilities, are still integral parts of many business parks today, but the proportion of office space and such newer uses as call centers is growing. Heavy industry, once a significant element of planned industrial districts, is seldom included. Economies have shifted away from heavy manufacturing, and communities concerned about environmental impacts prefer lighter, higher-tech businesses as employment generators. Zoning often restricts the location of heavy industry in business parks and closer-in areas, whereas at the same time, large manufacturing companies generally prefer to locate at stand-alone sites farther outside the city where land is cheaper.
Today, business park locations tend to be in suburban areas with freeway and airport access. Proximity to housing, shopping, cultural amenities, and educational facilities is sometimes important, depending on the types of uses being targeted. older inner-city industrial sites with good freeway access are becoming attractive again because of the availability of existing buildings and infrastructure at infill locations.
An industrial building is defined by the National Association of Industrial and office Properties as “a facility in which the space is used primarily for research, development, service, production, storage, or distribution of goods and which may also include some office space.”
All types of industrial properties have common characteristics despite variations in functions and use. Three primary categories of buildings are typically used to categorize industrial real estate: manufacturing, warehouse, and flex. Within these categories are a variety of subcategories that have distinctive physical characteristics to accommodate specialized functions.1 These buildings may be located in industrial areas or master-planned business parks, or they may be stand-alone structures. The typical building characteristics of the three primary industrial building types are shown in figure 6-1. This matrix illustrates the spatial configurations of the various industrial building types and the relationship of the subcategories to each primary category.
FIGURE 6-1 | Typical Industrial Building Characteristics by Type
More specialized subsets exist within the categories. For example, within “manufacturing” is a further breakdown of “heavy and light” classes. Within “general-purpose warehouse” exists “bulk warehouse, cold/refrigerator storage, freezer storage, high cube, self-storage, and bonded.”
MANUFACTURING. Manufacturing structures are large facilities designed to accommodate the equipment for manufacturing processes. Light manufacturing buildings can be up to 300,000 square feet (27,880 m2); heavy manufacturing buildings are more than 1 million square feet (93,000 m2).
Floor-to-ceiling heights range from 10 to 60 feet (3–18.3 m) and average 20 to 24 feet (6-7.3 m). Large bay doors with at-grade or dock-high parking for large trucks and ample room for trucks to maneuver are usually a necessity. With the exception of assembly-related facilities, parking ratios vary—as low as 1.5 parking spaces per 1,000 square feet (95 m2) of building area, depending on the planned number of employees. Because of their minimal parking requirements, traditional industrial buildings frequently cover 25 to 45 percent of a site (FAR).
The development of heavy manufacturing facilities has slowed considerably since the mid-20th century, their place taken by clean light manufacturing industries that have contributed significant demand for new industrial space. Because they focus on technology-based activities, these industries typically produce fewer of the undesirable side effects that limited the location of the older heavy industries.
Manufacturing facilities are often designed specifically for a company’s manufacturing process. Consequently, few tenants are interested in taking over another company’s manufacturing facility. Nevertheless, these manufacturing plants often have special equipment, such as heavy-duty cranes, that some companies find very valuable. Once a new tenant is found, it will likely stay there longer because of the specialized design and equipment.
WAREHOUSE. Warehouse buildings focus on the storage and distribution of goods. Within the category are three major subtypes of facilities: general-purpose warehouse, general-purpose distribution, and truck terminal. Some differences exist in these types in their size, ceiling heights, and loading requirements, but in general, they have similar requirements: large, flat sites with space for maneuvering trucks and access to transportation facilities.
Warehouse buildings have low employee-to-area ratios—typically one or two employees per 1,000 square feet (95 m2). As a result, only a small amount of employee parking is needed. Most warehouses have a minimal amount of office space—5 to 10 percent of total floor area. In some buildings, however, as much as 10 to 20 percent of the area may be allotted to office uses, chiefly to accommodate the purchasing, accounting, and marketing staff of a distribution or manufacturing company. Typically, these buildings have an attractive front elevation with ample windows for the office portion of the building and provide good truck access to the rear or side of the building. Dock-high and/or drive-in doors are provided to serve the warehouse functions.
In recent years, clear height, also referred to as “clear headway,” which is the distance from the floor to the lowest hanging ceiling member, of warehouse buildings has increased from 26 to 28 feet (8–8.5 m) clear to 32 feet (9.7 m) or more clear at the first perimeter bay where stacking does not usually occur. The clear height then increases as the roof slopes upward toward the center of the building to a clear height of 40 feet (12 m) at its highest point. The extra clearance provides room for higher stacking. Plentiful truck bays, preferably on opposite sides of the warehouse, are critical for moving merchandise in and out, as the added value for bulk warehouses is the ability to move goods faster with minimal storage time.
Warehouse/distribution buildings have become substantially larger than they were two or three decades ago. Previously, buildings of 400,000 square feet (37,175 m2) were considered large. In the early 2000s, spaces from 750,000 to 800,000 square feet (70,000–74,350 m2) are being occupied by single tenants. one reason behind the demand for larger spaces is the consolidation of distribution businesses. Many sophisticated third-party logistics companies now handle transport of merchandise and parts for other companies.2
Some communities oppose the development of warehouses because they bring lower tax benefits and more truck traffic than other types of industries. on the other hand, such buildings generate relatively little daily automobile traffic and can be attractively landscaped.
FLEX. As its name suggests, flex space is industrial space designed to allow its occupants flexibility of alternative uses of the space, usually in an industrial park setting. Flex buildings are typically one- or two-story structures ranging from 20,000 to 100,000 square feet (1,860–9,295 m2). The pattern for internal uses has been about 25 percent office space and 75 percent warehouse space, but this proportion is changing in favor of more office space in many markets. External designs are generally clean, rectangular shapes with an abundance of glass on the front facade. Building depths vary, so developers need to understand the market to determine the best configuration.
Specialized R&D flex buildings fall into two distinct categories. one category includes facilities in which research is the primary, or only, activity. Design of the interior spaces is frequently unique to the specific research that will be carried out there. The other type of R&D building is intended to serve multiple uses. This type of structure, which may have one or two floors, often has office and administrative functions in the front of the building and R&D or other high-tech uses in the rear.
Offices in R&D buildings typically have open floor plans to promote teamwork and collaboration, and to facilitate easy rearrangement of spaces and furniture for rapidly changing work groups. Many tenants are small startup companies; others are subsidiaries of major corporations. Activities range from the creation and development of new technologies and products to the development, testing, and manufacture of products from existing technology.
The design of tenant improvements is more important for R&D uses than for other industrial uses and is usually tailored to the needs of specific tenants. The percentage of space allocated to laboratories, research offices, service areas, assembly, and storage varies widely. Hard-to-rent space in the center of buildings is well suited for laboratories and computer rooms where environmental control is critical.
MULTITENANT. Multitenant buildings cater to customer-oriented smaller tenants, such as office, showroom, and service businesses, that require spaces of 800 to 5,000 square feet (75–465 m2). The buildings are generally one story, with parking in the front and roll-up doors in the rear for truck loading. They provide parking ratios of two to three spaces per 1,000 square feet (95 m2) and turning radii in loading areas that are large enough for small trucks. Leased spaces are built so that they can be divided into modules as small as 800 square feet (75 m2). Frequently, 25 to 50 percent of the interior is improved, leaving the balance of the building as manufacturing, assembly, or warehouse space.
The LEED Silver-certified Franke Corporate Headquarters and Distribution Center occupies about 40 acres (16 ha) near the Smyrna, Tennessee, airport. The site includes a warehouse and a two-story corporate office and research center.
© 2009 JIM ROOF CREATIVE, INC.
Some developers build all the tenant improvements for a project along with the base building, whereas others initially build just the shell and wait to build tenant improvements as space is leased. The first method limits flexibility and increases upfront costs; the second can be expensive if materials for tenant improvements cannot be bought at bulk prices. Methods for building tenant improvements frequently depend on a project’s marketing scheme and anticipated absorption rate.
Exterior designs vary. Some markets require an upscale look that can be supported only by higher rents. In other markets, multitenant buildings are considered economy space so the most cost-effective combination of construction materials is used.
OFFICE/TECH. office/tech buildings are used primarily for office space. They may provide limited truck access and warehouse facilities. Users of such buildings generally look for large volumes of space to house employees and have only limited interest in space for laboratories or computer facilities. Large paper processors, such as insurance companies and banks, require large office spaces and desire low rental costs for their back-office functions; hence, they prefer the cost advantage and efficiency of office/tech industrial buildings. High parking ratios—such as three and one-half to four spaces per 1,000 square feet (95 m2) of net rentable area—are important to office/tech users.
FREIGHT. Freight facilities are not always included as a category of industrial real estate, but they are increasingly important in supply chain management. The freight-forwarding processes involving the transfer of goods from trucks to trucks and from planes to trucks require specialized buildings, each of which has special requirements for loading capabilities, building configurations, and space buildout.
TELECOMMUNICATIONS. Two types of telecommunications facilities have emerged since the late 1990s: data warehouses and switch centers. These types of buildings can be developed through the conversion of an older building that has access to fiber-optic cable or the construction of a new building solely for telecommunications use.
Business parks are multibuilding developments planned to accommodate a range of uses, from light industrial to office space, in an integrated park-like setting with supporting uses and amenities for the people who work there. They can range in size from several acres to facilities of several hundred acres or more.
Most business parks offer a conventional mix of warehouses, flex space, and offices to meet the needs of a range of occupants. Over the past 25 years, however, more specialized types of business parks have emerged. Although each of them can be categorized by a distinctive function and design characteristics, product types and their users overlap considerably. The primary categories include the following:
• Industrial Park—Modern industrial parks contain large-scale manufacturing and warehouse facilities and a limited amount of or no office space. The term industrial park connotes a setting for heavy industry and manufacturing, but it is still sometimes used interchangeably with business park.
• Warehouse/Distribution Park—Warehouse and distribution parks contain large, often low-rise storage facilities with ample provisions for truck loading and parking. A small portion of office space may be included, either as finished space built into the storage areas or housed in separate office structures. Landscaping and parking areas are included, but because of the relatively low ratio of employees to building area, on-site amenities for employees tend to be minimal.
• Logistics Park—Such business parks focus on the value-added services of logistics and processing goods rather than warehousing and storage. As centers for wholesale activity, they may also provide showrooms and demonstration areas to highlight products assembled or distributed there.
• Research Park—Also known as R&D and science parks, research parks are designed to take advantage of a relationship with a university or government agency to foster innovation and the transfer and commercialization of technology. Facilities are typically multifunctional, with a combination of wet and dry laboratories, offices, and sometimes light manufacturing and storage space. Biomedical parks are a specialized version.
• Technology Park—Technology parks cater to high-tech companies that require a setting conducive to innovation. They rely on proximity to similar or related companies rather than a university to create a synergistic atmosphere for business development.
• incubator Park—Incubator parks or designated incubator sections of research or technology parks meet the needs of small startup businesses. Often supported by local communities through their economic development agencies or colleges, they provide flexibly configured and economically priced space and opportunities for shared services and business counseling.
• Corporate Park—Corporate parks are the latest step in the evolution of business parks. Often located at high-profile sites, they may look like office parks, but often the activities and uses housed there go beyond traditional office space to include research labs and even light manufacturing. Supporting uses, such as service-oriented shopping centers, recreational facilities, and hotel/conference centers, are provided as a focus rather than an afterthought.
Older industrial districts offer opportunities to beginning developers, especially underused buildings suitable for rehabilitation and small infill sites. Many communities have established programs to encourage redevelopment of older industrial areas. Redevelopment agencies and economic development agencies may offer incentives such as tax abatement and financing to developers who build in designated redevelopment areas. Renovation of older industrial areas offers many development opportunities:
• upgrading low-tech, light industrial buildings to be competitive with newer facilities;
• redeveloping low-tech, light industrial buildings for higher-tech R&D and office uses;
• rehabilitating major plants, such as outmoded automobile plants, into multitenant warehouses and office/tech buildings;
• removing heavy industrial facilities and reusing the land for business parks; and
• adapting obsolete urban warehouses to commercial, office, and residential uses, which have become increasingly prevalent.
The strong economy of the late 1990s and early 2000s motivated many developers to look at underperforming older industrial buildings for their potential reuse. many of the more easily resolved problem properties have been taken, leaving properties that are likely to have more serious difficulties. Despite these issues, developers have access to a large pool of bargain-priced properties by performing suitable due diligence before buying industrial property.
Some of the potential issues surrounding the rehabilitation of older buildings include cost overruns, title problems, building code problems, poor street and utility infrastructure, and unforeseen construction problems. A major concern that must be addressed is the cleanup of contaminated sites. The answer to which party in the ownership chain is responsible for environmental remediation and what constitutes a suitable cleanup for various planned uses is still evolving.
Reengineering older industrial buildings with historic character is a special challenge. Architectural features should be retained as much as possible, and additions and improvements should be sympathetic with the existing design. New roofing and insulation, new windows with energy-efficient double- or triple-pane glass, the repair and cleaning of exterior wall surfaces, and painting and other cosmetic improvements are common exterior changes. A significant portion of the budget for internal redesign may be required to bring a building up to current fire and safety codes: enclosing stairways, adding sprinklers and fire alarm systems, installing or upgrading new wiring and plumbing, and upgrading or installing the heating, ventilating, and air-conditioning (HYAC) system.
The market analysis that precedes site selection for industrial development serves three purposes: to identify the types of users that will be served, to identify the type of product to be built and thus the parameters of the site to be purchased, and to identify where the product should be located. Just as for office development, the developer should be familiar with basic data about the local economy and its relation to the regional and national picture. The items that should be checked include
• national, regional, and local economic trends;
• growth in employment and changes in the number of people engaged in job categories (as measured by Standardized Industrial Classification codes);
• socioeconomic characteristics of the metropolitan area, including rates of population growth and employment patterns;
• local growth policies and attitudes toward office and industrial development;
• forecasted demand for various types of office and industrial facilities;
• current inventory by industrial subtype;
• historic absorption trends and current leasing activity; and
• historic vacancy rates and current space available.
This information is available from a host of sources, including government and commercial websites, local universities, market analysts, data service firms, chambers of commerce, and major real estate brokerage firms. In addition to evaluating statistics, the developer should consult local brokers, tenants, and other developers to verify the accuracy of the information obtained. A developer who is unfamiliar with the local area should hire a market research firm with experience in industrial real estate.
Few market data sources segment industrial space beyond the categories warehouse/distribution, manufacturing, and flex, and in many cases, secondary market data are lumped into a single category labeled industrial, making it difficult to assess the performance of individual subtypes. one method of obtaining a rough idea of the various property types when the information is not broken down is to segment properties by size categories, such as “under 5,000 square feet” or “larger than 25,000 square feet” (or “under 1,000 m2” or “larger than 2,500 m2”).
Before searching for specific sites, a developer must become thoroughly familiar with industrial development patterns throughout the metropolitan area. During this investigation, the developer wants to learn as much as possible about local market conditions and which types of industrial tenants are expanding or contracting. A developer or industrial company looking for a large, single site is concerned with a number of issues:
• availability and cost of land;
• transportation infrastructure/highway access;
• labor quality and cost;
• tax structure and tax incentives;
• utilities and waste disposal;
• energy rates; and
• comparative transportation rates.
Market preferences, land costs, labor costs, utility costs, and transportation costs can differ dramatically within the same city or region. Companies with markets outside the city have different criteria for site selection from those with markets primarily inside the city. The developer’s market analysis before site selection should assess the target market’s preferences regarding such factors as access to transportation and location.
LOCAL LINKS. Local links are critical to many companies. Firms that have frequent contacts with suppliers, distributors, customers, consultants, or government agencies consider the following in choosing a location:
• accessibility to firms with which they do regular business;
• the number of trips to be made to and from their business inside the metropolitan area;
• congestion in and around the site;
• commuting time for employees and public transportation available; and
• vehicle cost, including taxes, maintenance, and fuel per mile traveled.
CLUSTERING AND AGGLOMERATION. A number of industries—food distribution, garment manufacturing, printing, wholesale flower marts, machinery parts and repair, commercial groceries and kitchen supplies, for example—tend to cluster together. The clustering, known as agglomeration or colocation, often relates to time-sensitive products (such as perishable foods) or to the interdependency of firms in a particular industry. High-tech firms tend to congregate in research parks near major universities, where they can take advantage of resources such as laboratories, libraries, professors and graduate students, and large pools of highly educated and skilled labor. Venture capital is also attracted to universities because of the commercially valuable discoveries they generate.
ACCESS. Access to transportation is fundamental to all types of industrial properties, although requirements vary by type of use. Virtually all industrial uses depend on trucking, so connections to major interstate highway systems are essential. In recent years, the growing “need for speed” in distribution, particularly of high-value goods, has made proximity to highways and airports more important than ever. Although rail service has remained an important factor for some manufacturing and industrial processes, smaller and lighter industrial users depend less on rail accessibility.
Airports exert a strong attraction for industrial users. In many cases, businesses locating near an airport use cargo and passenger services regularly. In other instances, this “airport effect” is the result of good highway access, available land, and favorable zoning.
FOREIGN TRADE ZONES. A foreign trade zone is a site in the United States in or near a U.S. Customs port of entry where foreign and domestic merchandise is generally considered to be in international commerce. Firms located in foreign trade zones can bring in, store, and assemble parts from abroad and export the finished product without paying customs duties until the goods leave the zone. Many foreign manufacturing firms transport their products to a warehouse in the trade zone, store the products until they are ordered by a customer or distributor, and pay the import duties when the product leaves the warehouse to be delivered to the customer. Thus, the firms can have readily available stock without having to pay the associated import fees until the product is actually needed.3
QUALITY OF LIFE. The more intangible factors surrounding quality of life should not be forgotten in site evaluation. Livability is an increasingly important aspect of business location decisions. The presence of affordable housing, quality schools, and recreational and cultural resources strongly influences a company’s ability to attract skilled workers.
Sample Market Analysis for a Multitenant Warehouse
This sample market analysis for warehouse space in Dallas indicates the steps to be taken in a market analysis for industrial properties. In this example, the analysis focuses on the Valwood submarket, a prime location for industrial space in the Dallas, Texas, metropolitan area.
A space inventory for Dallas and the Valwood submarket (figure A) provided a historical sketch of how the submarket has evolved in recent years. At the time of the survey, vacancy rates remained comparatively low, 6 to 7 percent, although some upward movement was obvious in Valwood.
Characterization of submarket rents and lease terms was obtained through a survey of brokers and a review of leasing comparables (figure B). Discussions with brokers also permitted a breakdown to be made of industrial tenants in Valwood by industry group (figure C). The breakdown indicated that rents were at attractive levels and unencumbered by concessions or high tenant improvement allowances.
Projections of warehouse space absorption in the Dallas metropolitan area were based on changes in gross metropolitan product and population. Total employment growth was also considered an indicator of demand in the market. These projections were then used to model metropolitan area warehouse absorption in Dallas. Fair-share capture was used to estimate what share of metropolitan absorption could be captured by the Valwood submarket. The area’s locational advantages suggested a capture rate of 10 to 15 percent in the near term and 15 to 20 percent in the long term. Net absorption in Valwood was estimated to be 9 million to 10 million square feet (836,400–929,400 m2) over the next ten years.
Warehouse space construction in Dallas was found to be occurring in a number of submarkets, including Valwood. Six projects totaling approximately 1.5 million square feet (139,400 m2) were anticipated to be completed in 1998, and another 2 million to 3 million square feet (185,900–278,800 m2) was expected to enter the market in 1999 to 2001 (figure D).
FIGURE A | Space Inventory for Dallas and Valwood
FIGURE B | Warehouse Rents and Lease Terms for Valwood
FIGURE C | Industrial Tenants by Industry in the Valwood Submarket
A final step in the analysis was to present an outlook and a projection of rents for the submarket. To accomplish these tasks, warehouse space absorption and construction volume were compared and measured by projected vacancy rates. These projections showed an upward trend in submarket vacancy through 2001. it was concluded that warehouse construction in valwood would outpace absorption, even though the Dallas economy was expected to expand at a healthy rate. The imbalance in supply was expected to correct itself by 2002 as development activity eased and absorption remained positive, but the threat of continued additions to supply remained a long-term concern.
in light of these trends, submarket rents in valwood were expected to experience only modest growth (figure F). larger properties of 100,000 square feet (9,300 m2) or more were not anticipated to realize any increase in rents, because much of the increase in supply was occurring in this property segment. The near-term prognosis for warehouse space in the under 25,000- and 25,000- to 40,000-square-foot (2,325- and 2,325-3,720 m2) category was more positive because of a lack of supply in these segments (figure E).
Source: Adapted from a case study by Marvin F. Christensen, RREEF Funds, San Francisco, California, in Real Estate Market Analysis: A Case Study Approach (Washington, D.C.: ULI–the Urban Land Institute, 2001).
FIGURE D | Warehouse Construction Pipeline in the Valwood Submarket
FIGURE E | Projected Change in Warehouse Rents in the Valwood Submarket, 1999 to 2007
FIGURE F | Completions, Absorption, and Vacancy in the Valwood Submarket, 1990 to 2007
Selecting the correct site is crucial to the success of an industrial development, and it is important to ensure that as many criteria as possible are satisfied. Location directly influences a development’s marketability, the rate at which space can be absorbed during leasing, the rents that can be achieved, and the eventual exit strategy.
EVALUATING SPECIFIC LAND PARCELS. Because they lack the staying power necessary to survive the many unpredictable delays of the approval process, beginning developers should avoid buying land that is not ready for immediate development. Obtaining zoning changes or variances and conditional use permits, installing major off-site infrastructure improvements, or waiting for the completion of planned transportation improvements tends to require more time and capital than most beginning developers have.
It is especially important that water, gas, electricity, telephone, and sewer services with appropriate capacities be available at competitive rates in a site for industrial use. The site should be flat to accommodate the large pads that are needed for industrial buildings and should have a minimal amount of ledge rock, groundwater, or peat with soft ground.
The presence of oil wells, natural gas, contaminated soils, high water tables, or tanks, pipes, or similar facilities can cause major problems and should be carefully studied to determine present and potential dangers. When searching for sites for office and high-tech uses, developers should also consider the following criteria:
• distinctive terrain and vegetation, such as a water feature, that can help market the project;
• the standards of development in the surrounding area and the level of commitment among neighbors to maintain high standards;
• proximity to residential and commercial areas;
• proximity to recreational and cultural amenities;
• availability of shopping, hotels, restaurants, daycare facilities, and fitness centers;
• proximity to mass transit and availability of active transportation management associations and car-pools;
• proximity to educational and technical training facilities, such as universities, community colleges, or technical schools; and
• accessibility from freeways, arterials, or mass transit routes.
Despite the desirability of proximity to amenities such as shopping and recreation, industrial tenants who use trucks frequently prefer to be located in exclusively industrial areas rather than in mixed-use areas.
FINDING AND ACQUIRING THE SITE. Public agencies, such as local planning departments, redevelopment agencies, and economic development agencies, possess a considerable amount of information useful to developers in the search for potential sites. Most communities have comprehensive plans or master plans that indicate the areas favored for industrial development.
Real estate brokers specializing in industrial properties are another good source for information about potential sites. Developers should first narrow down their target area and then work with brokers familiar with it to obtain information on sites that may not currently be on the market.
Remaining sites in business parks that are approaching buildout should be considered as potential sites. Extra land around existing industrial buildings, often used for storage, may also present opportunities to expand a building for current tenants or to build another one. Owners of such properties may be interested in becoming a partner for the addition or may prefer to sell the land outright. If the land is in the back of the property, care must be taken with respect to access and visibility to ensure that the new building is leasable.
Infill sites offer developers the advantages of readily available streets, sewer, water, and other public services. But existing streets may be too narrow and space may be too constricted to allow for the creation of the high standards that tenants now expect of business parks. The developer should consult with local neighborhood groups and property managers of neighboring industrial and other properties to learn about potential problems in advance.
Site acquisition for industrial property follows the same four steps as for other forms of development: investigation before the offer is made, the offer, due diligence, and closing (see chapters 3 and 4).
During due diligence, developers should pay attention to hazardous wastes, especially if existing industrial uses are present nearby. Waste spilled locally may be spread by the water table to an otherwise clean site: a small amount of solvent or gasoline can show up as hazardous waste two or three years after it was spilled. Appropriately licensed engineers should perform water and soils tests; if necessary, developers should ensure that enough time is allowed to verify that no toxic waste is present by paying for an extension to the option. Sellers typically give buyers 60 days to perform due diligence for soils and toxic waste and 30 to 60 days for everything else.
Most developers face a standard dilemma during site acquisition. They need time to execute thorough due diligence, while the seller wants to close as quickly as possible. Both desires are perfectly reasonable, but protracted periods of time before closing are usually not met well by an eager seller and they can kill a deal. At the same time, rushing into a purchase to find out later that the site requires major environmental cleanup or going ahead without financing fully in place may be too high a price to pay to win the property.
As described in detail in chapter 3, site acquisition generally takes place in three stages: (1) a free-look period, (2) a period during which earnest money is forfeitable, and (3) closing. The agreed-on terms depend on market conditions. In a hot market, acquisition can be difficult for most developers and nearly impossible for those with financing contingencies.
Howard Schwimmer, executive vice president for Daum Commercial Real Estate Services, faced one of the hottest markets ever experienced in Commerce, California, but following a few basic tenets, he was able to successfully negotiate the purchase of a 240,000-square-foot (22,300 m2) industrial property that had fallen into foreclosure. Recognizing that complicated contracts and legalese in the first stage of an acquisition are usually not well received by a seller, Schwimmer submitted a letter of intent stating his ability to close the deal in three weeks with cash. A week or two after the seller accepted the first letter of intent, the parties agreed to a purchase and sale agreement that included an environmental review contingent on the transfer of the deed. The property was located on a parcel adjacent to contaminated ground, and lead had migrated onto the seller’s property. The lead was discovered during the environmental inspection; further testing and abatement extended the closing date by two months.
During this time, the buyer was able to conduct thorough due diligence and to leverage the project more favorably. The property was successfully acquired at a price considerably below the market rate.4
ENGINEERING FEASIBILITY. Preliminary engineering investigations are an integral part of due diligence. In the case of purchasing existing industrial buildings, engineering studies are among the first steps of feasibility analysis. A civil engineer usually leads the site investigation under the developer’s direction. Chapter 3 provides a comprehensive review of the site evaluation process for all types of development. For industrial development, the two most significant aspects of this process are utilities and environmental regulations.
Page Business Center in St. Louis is a three-building complex that combines new construction and renovation. Each building meets a different level of LEED certification.
GREEN STREET DEVELOPMENT GROUP, LLC
Utilities. Many manufacturing and some R&D facilities use enormous amounts of water and electricity. Because most water is discharged eventually into the sewer system, both water and sewage services are affected. The capacity to service such customers can be a good draw, especially in areas where the availability of water is limited.
A developer should meet with the local water company as early as possible to discuss plans and to learn about the utility company’s current capabilities and limitations. The developer’s engineer can obtain preliminary information on flow and pressure from the utility company. Fire departments usually require that the water system and fire hydrants be installed and activated before construction can start on individual buildings.
Some local agencies require the installation of lines to reclaim water for irrigation and some industrial purposes. Some localities require that two parallel systems, domestic and reclaimed, be installed on every lot. The developer should meet with the sewer company to determine the following information:
• capacity of sewage treatment facilities;
• capacity of sewer mains;
• whether gravity flow for sewage and drainage is sufficient or if pumps are necessary;
• the party responsible for paying for off-site sewer extension;
• the due dates for payments and impact fees;
• quality restrictions on sewage effluent: some sewage treatment plants impose severe restrictions on the type and quantity of chemicals that firms can discharge into the general sewage system;
• discharge capacity for sewage effluent;
• flow standards; and
• periodic service charges: although the rate structure for service charges does not directly affect the developer, it will influence prospective purchasers of property, especially heavy users, such as bottling plants.
Cities that use water consumption as the basis for sewer system service charges may penalize projects that consume a large quantity of water to irrigate landscaping. In such cases, the developer may attempt to negotiate treatment costs based on anticipated discharge rather than on water consumption.
Industrial land developers usually must front the costs for water and sewage lines and for treatment plants and then recover those costs as part of the sale price or rental income. They may also be reimbursed by developers of other subdivisions and owners of other properties that subsequently tie into the water and sewage mains. Most cities that provide for reimbursement by subsequent developers, however, do not permit the original developer to recover carrying costs. Moreover, because of the unpredictable timing of such reimbursements, developers cannot rely on them to help meet cash flow requirements.
For business parks with multiple buildings, developers should provide the local utility companies with information about the types and sizes of buildings in their plans so that they can project the estimated demand from the project. Electricity can be a big issue, especially for manufacturing and R&D users. The projected demand is used to design the local distribution system as well as the systems that will feed the local systems.
The frequency of power outages and gas curtailments during the winter should be investigated because this factor can deter potential tenants and buyers. Frequent outages also may influence the developer’s choice of target market or may change his decision to purchase the site altogether.
Environmental Regulations. Many federal environmental statutes can affect industrial development:
• The National Environmental Policy Act requires projects that use federal funds to produce an environmental impact statement for approval.
• The Clean Air Act requires the provision of information on anticipated traffic flow and indirect vehicle use.
• The Clean Water Act severely restricts discharge of any pollutant into navigable and certain nonnavigable waters.
• The Occupational Safety and Health Act requires employers to provide safe working conditions for employees.
• The National Flood Insurance Act limits development in flood-prone areas and requires developers who build in flood-prone areas to meet standards concerning height, slope, and interference with water flow. The act requires that a project not impede the water flow speed and volume that exist before development in any floodway traversed by the project.
• The Comprehensive Environmental Response, Compensation, and Liability Act, also known as Superfund, addresses issues concerning toxic waste.
In addition, each state and local municipality may have its own environmental laws that affect industrial development.
Concerns about toxic waste, water supply, sewage treatment constraints, and sensitive environmental areas are forcing developers to perform very careful site investigation before closing on a tract. Although laws in most states give developers some recourse against prior owners in the chain of title for problems such as toxic waste, such protections are of little use if developers cannot proceed with their plans.
States continue to work to ease the liability put on developers when they engage in projects that come with environmental wildcards and potentially massive costs. This trend began in the 1990s in Massachusetts, when the attorney general’s office successfully negotiated a number of covenants not to sue with developers reclaiming brownfields. According to Raymond Bhumgara, the state recognized that future owners of sites should not be held liable for contamination that they did not cause.5 These covenants protect developers from being financially responsible for cleanups after taking ownership of a parcel and then having to pull out of the project. These types of covenants were more recently used in Atlanta, Georgia, in the development of Atlantic Station, a massive mixed-use project that was built on a site formerly occupied by a steel mill.
Urban adaptive use and the conversion of industrial properties to residential or live/work spaces generate new concerns for industrial developers. These conversions can have a positive effect on economic development in underperforming neighborhoods but can simultaneously cause incompatible uses in a single zone. Consequently, developers must create environmental impact reports to show, among other things, traffic and noise effects on adjacent properties. The gradual infiltration of residential uses into industrial zones is increasing the sensitivity of environmental requirements in these newly created mixed-use areas.
Once a site has been secured with a signed earnest money contract, the second, more detailed phase of the market analysis begins. The purpose at this stage is to investigate the immediate market area for information about rental rates, occupancy, new supply, and features of competing projects.
An important step before beginning this stage of market analysis is to define the property type or types most likely to be developed at the site to focus the research and determine which other properties constitute potential competition. This often overlooked step can help narrow the amount of research and reduce unnecessary effort.
INDUSTRIAL SUPPLY ANALYSIS. The first task in identifying future supply is to identify properties that are currently under development or construction. A drive through the submarket and follow-up calls to brokers and active developers can yield information on project sizes, completion dates, costs, and rents. Information on proposed projects that have not yet broken ground can be obtained from local planning and building departments.
Estimating the amount of additional space to the industrial supply beyond two or three years is difficult. Industrial buildings take a relatively short time to build, and when vacancy rates are low, the amount of construction can increase quickly. It is useful to look at factors such as the amount of land available for industrial development in the submarket and estimate the number of years before the available land supply is absorbed, given the likely pace of development. Some market analysts and data providers use econometric models to forecast new construction. Those numbers may not be entirely accurate, but they provide an approximation of future conditions.
Developers should keep in mind that the public sector may influence future supply. Cities and redevelopment agencies offer incentives to industrial tenants. If developers are not offered the same benefits as those available to others, they are at a competitive disadvantage.
An analysis of potential competitors helps assess the strengths of the proposed project compared with its competition. Again, a good place to start to collect this detailed data is from real estate brokers or management companies involved in the marketing of industrial developments who may be willing to provide plans or brochures and marketing materials on individual properties.
The developer should collect information on competing projects for the following items:
• overall site area and the size of individual lots and buildings if it is a multibuilding development;
• schedule, including date when marketing was initiated;
• occupancy levels at the date of the survey (acres sold, total square feet leased for each type of facility, percentage of space occupied);
• estimated annual land absorption;
• estimated annual space absorption by property type;
• initial and current sale prices and lease rates per square foot (land and buildings);
• lease terms and concessions;
• tenant allowances to finish interior space;
• building characteristics and the quality of architectural and landscape design, level of finish, quality of materials, signage, overall park appearance, and maintenance;
• development cost per acre;
• major highway access, rail availability, and utilities;
• amenities such as retail services, restaurants, open space, recreation, daycare, and health and conference facilities; and
• developer or current owner.
Demand models for industrial space often emulate office demand models, where a change in employment is a prime determinant of potential space absorption. However, industrial absorption often lags office demand. Multiplying the estimated number of new employees in a metropolitan area by the space allocated per employee provides an estimate of future space requirements. (It is important to keep in mind that space ratios are different for different types of industrial space.)
Analysts should also review other measures of metropolitan growth, such as gross metropolitan product or changes in total population or households. Growth in gross metropolitan product is a good indicator of absorption of warehouse or distribution space because it is a measure of the output of a local economy. Another indicator is manufacturing output as measured by the Federal Reserve Board’s Index of Manufacturing Output.6 Sometimes, demand is tied to growth in another nearby city. Warehouse space along the U.S. border in southern California is correlated with the growth of warehouse space in Mexican cities just south of the border.
After space demand is calculated for a metropolitan area, a final step is to estimate what share of the area’s absorption will be captured by the submarket where the property is located. Often, the concept of fair share is used. For example, if a submarket holds 8 percent of a metropolitan area’s industrial space inventory, then its fair share is 8 percent. Another method is to examine the historical share of net absorption in the submarket in relation to the metropolitan area’s net absorption over time. This information should provide an overview of how well the area stacks up against other locations. If a submarket is overbuilt, a developer may choose to sit on the land for months before beginning construction.
The Perris Ridge Commerce Center in Perris, California, is a 1.3 million-square-foot (121,000 m2) build-to-suit facility. When completed in 2009, it became the world’s largest LEED-certified warehouse.
RIDGE PROPERTY TRUST
Allan Kotin, of Los Angeles–based Allan D. Kotin & Associates, observes that market analysis for industrial space has more pitfalls than for other types of development. Industrial zoning is far more permissive with respect to land use than is commercial, office, or residential zoning. Industrial zoning often allows any of the other uses except, perhaps, residential and may therefore lead to overestimation of the size of the market. “There is a blurring of key distinctions in the general category that can lead to such errors,” notes Kotin. “Nominally industrial space that is half finished as office space and rents for about $1 per square foot [$10/m2] per month cannot be averaged with traditional industrial space that is 10 percent finished and rents for $0.45 per square foot [$4.85/m2].”7 Developers must look at the type of use and the degree of finish to determine rents accurately.
Industrial development provides a back door into both office and retail development, and market analysts sometimes mistakenly include absorption figures for office and retail users in their estimates of demand by industrial users. The distinction between product types can be made primarily by the amount of tenant improvements. Care must be taken to isolate the percentage of nonindustrial users. Office users in industrial buildings are often tempted to move back into higher-image office buildings, especially if office markets are soft.
Another concern is incubator industrial space, a frequently abused concept. Originally, incubator space was intended to house small firms that have the potential to grow into large ones. In practice, however, users are often marginal firms. Those firms in incubator space that actually grow and prosper are in the minority; thus, potential tenants should be carefully scrutinized. The different ways of measuring rents must be accounted for in the analysis. Some tenants have full-service leases, in which the landlord pays all expenses, while others have triple net (NNN) leases, in which the landlord pays no expenses. Some tenants have modified industrial gross leases in which the tenant pays direct utility costs, internal janitorial costs, and insurance, but the landlord pays for common area maintenance.
The approval process for industrial parks is similar to that described in chapter 3. Although the basic procedures for platting industrial subdivisions depend on the local area, most communities begin with some form of tentative approval, such as the tentative tract map in California. After appropriate review by the public, the developer is eligible to obtain a final tract map, also called the subdivision plat. The final tract map indicates the lot lines, setback requirements, allowable floor/area ratios (FARs), and other restrictions that determine the developer’s buildable site and its density.
The approval process for individual buildings may be as simple as obtaining a building permit or as complicated as the process for a full-scale business park. Normally, if the developer is building within the envelope of the existing zoning and subdivision restrictions, the approval process is similar to that for individual commercial and office buildings. If variances or changes in the zoning are sought, however, the approval process may be lengthy and expensive. Planning commissions and city councils tend to be especially concerned about truck traffic, as well as noise, fumes, and other negative effects of the planned development. Some communities are eager to attract the employment opportunities that industrial development generates, while many others are more concerned about keeping out truck traffic and preserving the character of business districts and residential neighborhoods.
ZONING. Several basic types of zoning districts are commonly used for industrial and business park development. Most common are the by-right districts, planned unit developments (PUDs) or floating districts, and special districts.
• By-right districts are the most traditional type of zoning district. Uses permitted by zoning regulations can be built by right without requiring further approvals.
• PUDs are known as floating districts because they can be applied anywhere the locality approves them. PUDs have flexible land use controls that can increase site coverage and provide for a mixture of uses. However, they usually require a long, drawn-out approval process.
• Special districts are approved by the local jurisdiction for a specific tract of land. The special district is then adopted as part of the local zoning ordinance. Provisions of the district are site specific and address issues such as land use, design, transportation, and landscaping.8
Zoning restrictions determine the size and placement of the structures that can be built on a given site. Typical zoning regulations for industrial buildings include
• front, side, and rear setbacks;
• height restrictions and FARs;
• access requirements;
• parking ratios;
• parking and loading design; and
• landscape requirements and screening regulations.
Most communities have maximum FARs for their industrial zones. In addition, landscape coverage ratios may be predetermined for the entire site or for the parking areas.
Although zoning ordinances have traditionally separated land uses from one another and limited the mix of uses in business parks, greater commingling of different land uses has occurred in recent years. The recognition that business parks often end up as sterile work settings without basic services or amenities for employees has led some communities to allow plans that include shopping facilities, restaurants, hotels, and even residential uses.
COVENANTS, CONDITIONS, AND RESTRICTIONS. Covenants, conditions, and restrictions (CC&Rs) are private land use controls and standards commonly used for business parks. CC&Rs take the form of a legally enforceable instrument filed with the plat or deed of individual buildings. They supplement municipal regulations, such as zoning and subdivision controls, and apply to virtually every aspect of a business park’s development, including site coverage, architectural design, building materials, parking requirements, signage, and landscaping.
Design guidelines can be included as part of the CC&Rs or as a separate document. They establish very specific uniform guidelines and criteria regarding bulk, height, types of materials, fenestration, and overall aesthetic design of the building. Subdivision restrictions sometimes require facilities for employees, such as outdoor lunch areas, recreation areas, and open space.
PUBLIC/PRIVATE NEGOTIATIONS. Increasingly, developers are required to negotiate agreements with local municipalities to secure approval for proposed projects. These agreements are especially helpful in volatile political climates in which pressures for no growth may cause city councils to change development entitlements unexpectedly. Public/private negotiations are also required when a developer seeks to work with a public agency on publicly owned land or in redevelopment areas.
In California, public/private contracts take the form of development agreements that usually take considerable time to negotiate.9 The agreements protect developers from later changes in zoning or other regulations that affect development entitlements and lend an air of certainty to the regulatory process by delineating most rights, requirements, and procedures in advance. Once adopted, no surprises related to approval should occur. Most agencies, however, require something in return, such as special amenities, fees, or exactions.
The use of public/private negotiations to shape the form of industrial developments is widespread, though not routine. In high-growth areas, public displeasure with the negative impacts of development has led to direct public involvement in negotiations with developers over specific projects. Many municipalities and counties have realized that well-planned industrial facilities such as business parks can provide significant revenues from property taxes. Some communities have therefore established redevelopment agencies to supervise negotiations with private developers and to represent the community’s interests as development proceeds.
The public sector’s role can include
• sharing risks with the developer through land price writedowns and participation in cash flows;
• creating utility districts and contributing toward offsite infrastructure;
• participating in loan commitments and mortgages;
• sharing operating and capital costs;
• reducing administrative red tape; and
• providing favorable tax treatment.
The role played by private developers is also expanding. Their functions may include paying for major off-site infrastructure and building freeway interchanges.
DEVELOPMENT AND IMPACT FEES. Some stages of the regulatory process require public hearings, and virtually all require some form of fee. The developer should understand the full range and scope of charges before closing on the land. Some of the more common fees that are assessed on industrial development projects include
• Approval and Variance Fees—Either a lump sum or a charge for the actual time spent by government personnel on processing an application;
• Plan Check Fees—Generally, a percentage of valuation;
• Building Permit Fees—Generally, a percentage of valuation;
• Water System Fees—Possibly based on amount of water used, meter size, frontage on waterlines, or a combination;
• Sewer System Fees—Usually based on expected discharge;
• Storm Drainage Fees—Usually based on runoff generated or on acreage;
• Transportation Fees—Based on trips generated or on square footage (some areas have freeway fees, county fees, and local transportation improvement fees);
• School Fees—Even industrial buildings are charged school fees per square foot in some areas;
• Fire and Police Fees—Usually based on square footage; and
• Library, Daycare, and Various Other Fees.
The types and amounts of fees vary drastically from one city to another. The developer must learn each city’s and each agency’s particular system of imposing fees. Because the fees can be imposed by a multitude of agencies, the developer should check with every agency that could possibly set fees. In many jurisdictions, the building department handles a majority of the fees and can be a good source of preliminary information.
STATE AND LOCAL INCENTIVES. State and local governments have developed a variety of incentive mechanisms to encourage industrial development:
• Publicly owned business incubator parks are designed to accommodate small startup companies; publicly owned research-oriented parks cater to high-tech companies.
• Enterprise zones, created by many states to encourage new industry in economically depressed urban areas, offer incentives to companies that locate in the zones. These incentives include various combinations of property tax abatements, industrial development bonds, exemptions from income and sales taxes, low-interest venture capital, infrastructure improvements, and special public services.
• State and local grants offer revolving commercial loans, loan and development bond guarantees, infrastructure projects that aid particular industries, and even venture capital funds.
• Tax increment financing is useful in areas with low tax bases. The difference between new taxes generated by development and the original taxes is reserved for infrastructure improvements for the designated area. Redevelopment agencies frequently use tax increment financing as a source of revenue for their projects.
Main entrance, Franke Corporate Headquarters in Smyrna, Tennessee.
© 2009 JIM ROOF CREATIVE, INC.
Industrial development bonds were very popular in the late 1970s and early 1980s, but the 1986 Tax Reform Act severely restricted the types of projects that could qualify for tax-exempt financing. Originally intended to bring manufacturing to depressed areas, bonds were used instead to provide tax-exempt financing for a number of activities, in both industrial and commercial development. Some communities abused industrial development bonds by using them to finance activities such as fast-food restaurants and other businesses in areas in which conventionally financed development was already occurring. Businesses complained that the bonds gave certain firms an unfair cost advantage and questioned the contention that industrial development bonds actually stimulated much development that would not otherwise have occurred. Despite these problems, a number of cities have used industrial development bonds effectively to generate development in once-stagnant areas.
As with other product types, financial analysis for industrial development is performed several times during the feasibility period. At the very least, it should be updated three times before closing on the land: (1) before submitting the earnest money contract, (2) before approaching lenders, and (3) before going hard on the land purchase.
At each stage of development, more information is known with greater certainty and accuracy. Data from the market study, design data, and cost estimates are incorporated into the financial pro forma as the information becomes available. Developers should not wait until these studies are done, however, before performing financial analysis; cruder information based on secondary sources may be used at earlier stages. For example, as soon as the size of the building to be built is estimated, the construction cost can be estimated from average costs per square foot for similar projects. Contractors and other developers will usually share this cost information.
The method of analysis for business park development is different from that for industrial building development:
• Business park development is a form of land development and follows the approach for analyzing for-sale property described in chapter 3.
• The stages of analysis for industrial building development are similar to the five stages of discounted cash flow (DCF) analysis for income-producing property described in chapter 4.
Hints for Dealing with Regulatory Agencies
Industrial developers offer some advice for dealing with agencies during the regulatory process:
• Industrially zoned areas have the fewest restrictions of all development types, but many areas prohibit certain industrial uses.
• Check the city’s general plan to make sure that the property is intended for industrial uses. Problems are more likely to occur if developers want to change zoning.
• Subdividing a lot and selling it as raw land or with buildings requires a platting process that will take at least six months.
• Be sensitive to all community activity that may lead a city to restrict or delay development by means of emergency ordinances such as water moratoriums.
Sources: Donald S. Grant, the O’Donnell Group; and Timothy L. Strader, Starpointe Ventures.
For building development, the major decision tool is the DCF analysis, a five- to ten-year pro forma showing the property’s operations from the completion of construction to sale. It incorporates rental rates, rent concessions, lease-up time, and expected bumps in rents over the holding period.
Internal rates of return are computed on the before-and after-tax cash flows. Industrial developers like to see IRRs on total project cost of 13 to 15 percent for an all-equity (unleveraged) case in which zero mortgage is assumed. A 15 percent unleveraged IRR typically produces a leveraged IRR (with a 70 to 75 percent LTV ratio) on equity in the high 20s. Leveraged IRRs on equity need to be 20 to 30 percent to entice investors.
The developer should use the financial pro forma to perform sensitivity analysis to test the impact of various assumptions on the results:
• For industrial building development, what effect do leasing schedules have on the IRR?
• How sensitive is the IRR to changes in assumptions with respect to rental rates and concessions, construction costs, financing costs, interest rates, release assumptions, and inflation assumptions?
• For industrial park development, what effect does lowering land prices to sell the land faster have on the IRR?
• What is the effect on the IRR if more money is spent up front on such items as amenities, roads, utilities, and entrances to permit faster sales or higher prices?
Because in-depth examples of multiperiod cash flow analyses for both land development and building development are included in chapters 3 and 4, none are included here.
This section deals first with design considerations for business parks and second with building design for the major industrial building types.
Site design is the biggest unknown variable in the design and construction of industrial building projects. Therefore, it carries with it the most risk. Jay Puckhaber of Panattoni, a large industrial developer, notes that “the science of industrial building design has reduced the structure to a highly refined assembly with few variables; this is why across the world, the buildings are so similar. On the other hand, sites are highly variable from location to location. Soil, site hydrology, and other local conditions can greatly affect the suitability of a property for an industrial project, and therefore a good local civil engineer who understands the local conditions is an important member of the project team.”
Industrial building projects require large tracts of flat land as a precondition. They are unable to adapt to significant topographical changes that a residential or office project might.
Site design for a business park must also consider a variety of interrelated variables, from lot layout to street systems to landscaping plans. Flexibility is a key issue. The site plan should easily accommodate new buildings, changes in traffic flow, and division into smaller parcels.
The planning process generally follows three general stages: concept planning, preliminary planning, and final planning. Each stage involves the collection and analysis of information about the site and the identification and evaluation of alternatives. Throughout the entire process, the developer and project planning team should maintain a meaningful dialogue with relevant public agency representatives because they can assist in compliance and in facilitating public support.
PLATTING AND LOT SIZE. Lots 200 to 300 feet (60–90 m) deep are popular for a variety of industrial uses. Large single users may require deeper lots of 500 feet (150 m), which can be subdivided if necessary. Lot width is variable and depends on the needs of the user. If parking requirements are minimal, building coverage may range from 50 to 70 percent of the total lot area. For example, a 20,000-square-foot (1,860 m2) building in an area limited to 50 percent coverage would occupy a 40,000-square-foot (3,720 m2) site. If the remaining 20,000 square feet (1,860 m2) were all used for parking, at 350 square feet (32.5 m2) per parking space on average, then approximately 57 spaces would be possible, for a parking ratio of 2.9 spaces per 1,000 square feet (95 m2).10
PARKING. The amount of parking required for individual buildings in a business park is dictated by zoning requirements and users’ needs, although frequently these two requirements differ. Most jurisdictions’ zoning and building codes require a minimum number of parking spaces based on the square footage of different uses being built, expressed as a ratio of spaces to 1,000 square feet (95 m2) of leasable space. Ratios have been increasing in recent years, and they now range from one to two spaces per 1,000 square feet (95 m2) for warehouse uses to three, four, or more spaces for R&D flex buildings and other predominantly office uses.
STREET DESIGN AND TRAFFIC. The location of external roads provides the basis for internal street systems in business parks. The ideal street layout for a business park provides easy access to the nearest major highway or freeway and discourages unrelated traffic. A public highway that runs through the middle of a park reduces the developer’s expenditure on internal roads and enhances the value of frontage sites, but it also tends to divide rather than unify the development, to bring heavy unrelated traffic through the middle of the park, and to increase the possibilities of accidents.
The more points of ingress and egress in a development, the better. For instance, assume that a 160-acre (65 ha) business park is being developed with an employment density of 20 persons per acre (50/ha). With 3,200 employees at 1.1 per car, approximately 2,900 cars would be in circulation. Three planned access points could probably accommodate that volume in just over an hour. If, however, a half-hour traffic jam occurs at the park nightly and the competing industrial park down the road does not have a traffic jam, the owner of the first park faces a serious marketing problem.
Within the site, roads must be designed to permit maximum flexibility in shaping development parcels because changes in demand could require modifications in site design at some point in the future. Contemporary business parks are most often designed using simple grids common to earlier parks while also taking into consideration topographical and site-constraining conditions.
Because traffic is a chief concern of most communities, developers should understand the impact that their proposed developments will have on traffic. One lane of pavement typically handles 800 to 1,200 trips per hour, depending on the street layout and traffic control at intersections. For purposes of design, developers should estimate the percentage and directional distribution of truck traffic. Overdesigning the traffic system is better than underdesigning it, as the intensity of future uses is unknown.
Design considerations also include road thickness, pavement type (concrete or asphalt), road curvatures, and sight distances for stopping, passing, and corners. Standard drawings of the following items are available in most agencies:
• typical street sections;
• commercial entrances and private driveways;
• culs-de-sac and turnarounds;
• intersections, interchanges, and medians;
• guardrails, bridges, and bridge approaches;
• signalization, signage, and lighting;
• drainage, curbs, and gutters;
• erosion control features;
• sidewalks, paved approaches, and pavement joints;
• safety features; and
• earthwork grading.
Standards are subject to constant revision. The developer usually relies on the civil engineer to ensure that street and utility designs conform to the latest standards.
Culs-de-sac need a paved turnaround of 100 feet (30 m) in diameter to allow trucks with 45-foot (13.7 m) trailers to turn around without backing up. Roadway widths depend on the amount of traffic the roadways handle, median design, and the absence or presence of parking. Some designers prefer that the major roads leading into a project have no parking and that interior access roads allow limited parking. Street parking can be advantageous to some businesses because it can provide space for overflow visitor parking.
WALKS AND LANDSCAPING. A carefully designed pedestrian system can be an attractive selling feature, particularly if it is connected to a nearby retail or recreation area. If the business park includes significant open space, then a pathway system (perhaps including a jogging path) through the space, away from heavy traffic, is also an attractive amenity.
In designing aesthetic features such as berms and slopes, developers should be aware that mowing equipment cannot handle slopes steeper than three to one (three feet horizontal to one foot vertical). Care must also be taken to avoid interfering with drivers’ visibility by landscaping and berms at road intersections. Where industrial uses adjoin residential uses, deep lots, berms, fences, landscaping, or open space can help to create a buffer.
TRUCK AND RAIL ACCESS. Well-designed truck access, docks, and doors are critical to the operation of most industrial facilities. The distance of the truck apron from the truck dock affects the on-site maneuverability of trucks. The current maximum length for a tractor and semitrailer can be somewhat longer than 70 feet (21.3 m). Therefore, the current recommended standard for a truck apron is 135 feet (41.1 m) minimum from the truck dock; some developers provide as much as 150 feet (45.7 m).
Project Landscaping Checklist
The following basic criteria must be considered when designing the landscape for a business park:
1. STREETSCAPE—Whether dealing with one parcel or a multitenant park, the objective is for the project to look good from the street, for the street to look good from the project, and for the street to serve pedestrians as well as vehicular traffic. Design elements include berming, pedestrian paths, sidewalks, and trails.
2. ENTRY LANDSCAPE—Monumental signage clearly marks and identifies a business park site. For an individual parcel, a site sign might be included in addition to exterior building signs. Standards set for the park dictate the type and placement of signs.
3. CIRCULATION—Site circulation, whether vehicular or pedestrian, should be direct and clearly marked. Way-finding devices include signage, berming, tree planting, seasonal planting, site furnishings, and artwork.
4. FRONT DOOR—Landscape architecture can reinforce the significance of a main entrance through paving materials and patterns, plantings, fountains, and plazas. Each choice comes with a cost; when projects are subjected to cutbacks, the last thing to go is usually the identity at the front door.
5. SERVICE AREAS—Service areas include truck docks, loading areas, Dumpsters, recycling areas, and outdoor mechanical, electrical, and communications equipment. When building orientation does not permit complete screening, other methods can be employed, such as commercial and evergreen fences, walls, and berming. Certain plant materials work better for this type of screening, and the landscape architect can recommend what is most appropriate for the site.
6. STORMWATER MANAGEMENT—Local codes contain requirements for stormwater management that typically state water must be retained on site for a period of time before it can be released. various retention methods can be used, from wet ponds to dry ponds to underground storage. The site’s size, topography, and budget help determine which is the most practical and cost-effective choice.
The path from the truck areas to the street should be scrutinized to ensure adequate turning radii for truck maneuverability. Developers should separate truck loading areas from passenger car areas to improve safety and to ensure that noise from loading and operating trucks does not interfere with R&D or office tenants.
According to David Hasbrouck, industrial buildings now have truck courts to fit 53- to 55-foot (16.1–16.8 m) trailers, compared with 43- to 48-foot (13.1–14.6 m) trailers ten years ago. Truck yards have increased from 120 feet to 135 feet (36.5–41.1 m) in depth.11
Most tenants do not require access to rail. If such access is contemplated, however, railroad officials should be contacted early in the design process to determine design requirements, reciprocal switching limits, frequency of switching service, and general rates. Some business park designs allow rail spurs to be installed later if a new tenant desires rail access. Developers must obtain the necessary easements and rights-of-way initially. It is extremely difficult if not impossible to do so later.
AMENITIES. Support services are an important amenity for tenants of business parks. In smaller parks, service kiosks can be installed. For example, a kiosk containing automatic teller machines, a Federal Express station, and post office services might be provided. In larger parks, a retail service center may be warranted. Specific uses vary widely; popular amenities include delicatessens, cafeterias, or full-service restaurants. Larger business parks can support small retail centers that cater to their industrial tenants and provide services such as printing, office supplies, computer supplies, and food services. Availability of hotel and restaurant facilities is also important to large-scale industrial parks, if permitted by zoning. Car repair shops and gas stations can also provide useful services to tenants.
The design of industrial buildings aims to combine functionality, economy of construction, and easy long-term maintenance. Beginning developers should study the design and construction of other buildings that serve the same market. They should speak to tenants to learn which features they require and to contractors about ways to save money. Finally, they should choose an architect who specializes in the particular industrial building type that they are planning, and they should talk to contractors and other developers who have previously worked with that architect. An architect who is an expert designer of office/warehouse space is not necessarily also an expert in R&D space. As with other product types, a team approach to design and construction is the most effective, and, ideally, the contractor and the leasing agent should be part of the design team and work with the architect to obtain a design that is both functional and marketable.
Designers of industrial buildings have pioneered many construction techniques that have been gradually adopted by other product types. Tilt-up wall construction, for example, was developed for the low-cost construction of large expanses of wall. The technology has been adapted successfully to both retail and office development.
BAY DEPTHS AND CEILING HEIGHTS. Bay depths of a building depend on two elements: the stacking plan of the proposed buyer or tenant and the construction system used. With wooden roof systems, bay depths are based on a four- by eight-foot (1.2 by 2.4 m) roof system. Thus, the structural system and design of the building should be based on multiples of four feet (1.2 m). Bay depths between columns are commonly 24 by 48 feet (7.3 by 14.6 m). Increasingly, large users look for bay spacing in excess of 48 by 48 feet (14.6 by 14.6 m) to accommodate more efficient racking and storage systems. Concrete block buildings are designed with the same system—three 16-inch (40 cm) concrete blocks equal four feet (1.2 m). Preengineered metal systems frequently feature multiples of four feet (1.2 m) or five feet (1.5 m).
The developer must assess the efficiency of a building’s design from the perspective of the buyer or tenant. A minimal number of columns are very important to tenants. The difference between two and three rows of columns can substantially affect the efficiency of stacking systems. The height of the building likewise depends on prospective tenants. Smaller industrial buildings and small multitenant buildings are frequently 16 to 24 feet (4.8-7.3 m) from floor to ceiling. The floor-to-ceiling height is measured as the minimum distance between the lowest structural member in the roof and the finished floor. Today, large industrial buildings and warehouse buildings are typically 30 to 32 feet (9.1–9.7 m) or higher from floor to ceiling. Because the roof must slope to allow rainwater to run off, the ceiling may be several feet higher. Clear heights above 30 feet (9.1 m) present more expensive structural issues and should be constructed only if the costs can be justified by demand. Although some taller warehouses are being constructed, most tenants cannot use the higher cubic footage.12
Older buildings near international airports are attractive to tenants who are part of the just-in-time delivery chain, which has led to the conversion of cheap older airfreight buildings. Warehouse tenants in the vicinity of Los Angeles International Airport look for a minimum of 22-foot (6.7 m) clear buildings and wide turning radii for trucks.
FOUNDATIONS AND FLOOR LOADING. Foundation design depends on the dead and live loads of each part of the building. If tilt-up wall construction is used, a concrete beam with steel reinforcement, called a spread footing or continuous beam, is poured along the line of the wall. The beam may be one foot to four feet (0.3–1.2 m) wide, depending on the load, and 12 to 24 inches (0.3–0.6 m) deep.
In areas with good soil and no earthquake risk, spot footings may be poured under each point where panels join. Spot footings are typically four feet (1.2 m) square and range in depth from 12 inches (30.5 cm) in good soil to 18 inches (45 cm) or more.
Where freezing weather is likely, the beam, or footing, must extend below the frost line because soil tends to expand when frozen. In Michigan, for example, footings are three to four feet (0.9–1.2 m) deep, and in Alaska they may go down five feet (1.5 m) or more, depending on the depth of the frost line. Areas with permafrost require special construction.
In areas with poor soils, a grade beam is used rather than a continuous beam to distribute the load over a greater area and to prevent cracking. Steel reinforcement is an integral part of the grade beam design, whereas a continuous beam requires fewer reinforcing bars (rebar) and is tied together only to the extent necessary to prevent movement during the concrete pour. The beams may be formed with plywood or by the dirt itself.
The slab is poured separately from the foundation beam, leaving a three- to five-foot (0.9–1.5 m) pour strip around the perimeter. The pour strip slab is poured before the walls are formed. In earthquake-prone areas, the pour strip ties the foundation and walls together into a monolithic unit through steel rebar that comes out of the footings, tilt panels, and slab.
Floor slabs that will support 250 pounds per square foot (1,222 kg/m2) provide flexibility for buildings with changing tenants and unpredictable floor loading requirements. This level of floor loading capability can accommodate different weight loads and a wide variety of users over time. Floor flatness is also an important factor so that high lift equipment can operate properly. So-called superflat floors have minimal variations in elevation from point to point and are primarily found in automated warehouses with picking machinery. Superflat floors are specified according to the F-number system that is governed by the American Concrete Institute (ACI 117).
WALL SYSTEMS. Three basic wall systems are in use today: concrete tilt-up, masonry, and preengineered metal panelized construction. Tilt-up wall construction now dominates industrial building construction in most parts of the country, although masonry is still popular for smaller buildings and in parts of the Northeast.
Concrete tilt-up buildings are constructed of large concrete panels poured on top of the slab, tilted up, and fastened together to create the exterior walls. Each panel is engineered with rebar and various steel fasteners to connect it with the adjacent panels and roof structure. These panels, which can contain windows and doors, are generally six to eight inches (15–20 cm) thick, 16 to 24 feet (4.8–7.3 m) wide, and as tall as the building (20 to 40 feet [6–12 m]). This type of construction is very economical because the panels act as the structural support system, the interior wall, and the exterior wall. To prepare for tenants, paint is applied to inside walls, and the outside face of the wall is painted, sandblasted, or finished with gravel to provide a textured appearance. Concrete tilt-up construction is one of the fastest methods of building industrial buildings because the walls are all poured at once, and, as soon as they are dry, they can all be put in place in one or two days.
After the walls are lifted into place, they may be welded or bolted (bolting requires considerable accuracy) to small steel plates that are cast into both the wall and the foundation before the concrete is poured. Temporary steel braces are used to support the walls immediately after they are lifted into place and before roof braces are installed.
Panels often break during lifting so they are sometimes braced with strongbacks—steel braces applied to the panels while they are being lifted and later removed. In masonry construction, heavy concrete blocks serve as both walls and support for the roof. Sometimes, a layer of face brick is added on the outside of the concrete block. High-quality blocks with sufficient steel reinforcement should be used to support the ceiling joists and roof. Longer expanses of wall should contain expansion joints to prevent cracking, and weep holes should be provided at regular intervals along the bottom course of bricks to allow the brick cavities to breathe and drain properly.
Comparison of Industrial Building Types
WAREHOUSE/DISTRIBUTION BUILDINGS
• Clear heights of 30 feet (9.1 m), but moving toward 32 feet (9.7 m) and higher.
• Large interior column spacing of 40 by 40 feet (12.1 by 12.1 m).
• Docks that are 4 feet (1.2 m) above ground level (truck bed heights vary from 3 feet 8 inches to 4 feet 8 inches [1.1–1.4 m]).
• Dock-high doors that are 9 or 10 feet (2.7 or 3 m) wide and 10 feet (3 m) high and double doors that are 20 feet (6 m) wide and 10 feet (3 m) high.
• Grade-level doors of 10 feet (3 m) wide by 12 or 14 feet (3.6 or 4.2 m) high if trucks are to drive into the warehouse.
• A minimum of 135 feet (41.1 m) of space in front of the dock for truck movements. Some developers prefer to make this distance 125 to 130 feet (38.1–39.6 m) to allow for a double row of parking in the space if the building is later converted into a more intense use.
• On average, one dock for every 10,000 square feet (930 m2) for warehouse buildings and one for every 5,000 square feet (465 m2) for heavy distribution buildings.
• Trailer storage, an attribute often overlooked, should provide one to two spaces per door.
• Truck ramps that optimally slope no more than 5 percent.
• Screening for loading docks and truck parking areas.
• Security features, such as fencing, gates, and guard facilities.
• A parking ratio of one space per 1,000 square feet (95 m2) is generous, though the parking ratio depends greatly on the user requirement.
MANUFACTURING FACILITIES
• Clear height rarely exceeding 30 feet (9.1 m).
• Separate entrances for cars and trucks, separate employee and public parking, overhead doors, and loading facilities. A mixture of dock-high doors and at-grade doors is usually an advantage.
• Parking ratios of two to four spaces per 1,000 square feet (95 m2) with an average of about three and one-half spaces per 1,000 square feet (95 m2).
• Emphasis on landscaping features for visitors and employees.
• Emphasis on security for employees.
• Interior column spacing conforming to manufacturing equipment requirements.
• Gas for processing.
FLEX FACILITIES
• One- or two-story buildings designed for maximum flexibility
• Office space of 12 to 14 feet (3.6–4.2 m) slab to slab for cabling and other building systems.
• Clear height of 10 to 24 feet (3–7.3 m) in warehouse area.
• Parking ratio of four to five spaces per 1,000 square feet (95 m2).
• Curb appeal in building design.
• Campus setting, preferably.
R&D/FLEX BUILDINGS
• A combination of offices and laboratories.
• Smaller bay depths and lower clear heights (14 to 16 feet [4.2–4.8 m]) than for typical industrial buildings.
• One- to two-story buildings with 25 to 75 percent office space.
• Specialized rooms and systems.
• Higher employee density than warehouse or manufacturing/assembly space.
• A parking ratio of four spaces per 1,000 square feet (95 m2).
• High curb appeal.
• Design features such as the extensive use of glass.
• Loading capability, including drive-in doors or docks.
MULTITENANT/SHOWROOM BUILDINGS
• Customer access in the front and truck access in the rear or intermixed traffic when units are back-to-back.
• Ample visitor parking and provisions for pedestrian access.
• Generous use of glass and architectural features.
• Easily divided space.
• Clear height of 16 to 18 feet (4.9–5.5 m).
• Parking at two to three spaces per 1,000 square feet (95 m2).
• Truck access at grade.
• A comprehensive signage program and unified entrance design.
Generally, a block eight inches deep by 16 inches wide by eight inches high (20.5 by 41 by 20.5 cm) is the basic unit of construction. Rebar can be laid in the hollow cavities of the blocks to provide additional strength. Windows and doors can be constructed using metal or wood headers. Many styles of concrete blocks are available in different textures and colors.
The preengineered metal panelized system is fabricated in a factory and shipped to the site to be erected. It consists of a steel post-and-frame structural system and a metal, panelized skin attached to the structural frame. The panels can be manufactured with a variety of surfaces, ranging from steel or aluminum skin to an aggregate or enamelized paint finish. Panelized systems offer speedy construction and low costs.
Prefabricated metal buildings are more attractive than they used to be. They can be designed to the developer’s specifications and delivered directly to the site. Metal panelized systems are less costly than other types of systems in buildings where the roof beams must support more than just the roof and in which clerestory spans exceed 40 by 80 feet (12 by 24 m). They are especially popular for traditional manufacturing facilities in which equipment is suspended from the roof.
ROOF SYSTEMS. Historically, the standard industrial roof consisted of three layers of tar paper and hot tar topped with a fine aggregate, commonly referred to as a “BUR” or “built-up roof.” In recent years, the industry has moved increasingly to specialized elastic plastics and EPDM rubber, “torch down” membranes that provide a single-ply application. These systems offer greater speed of installation as well as simplified maintenance. In some cases, these materials also qualify for sustainable building credits for their reduction of solar gain and heat-island effect. Roofs made of these materials have become competitive in cost and last longer than the five- to seven-year life span of a three-ply roof.
Different types of roof framing systems are popular in different parts of the country. Wood structure systems, for example, dominate industrial construction on the West Coast and throughout much of the Midwest, whereas metal truss systems are more popular in Texas, in the South, and on the East Coast. The preferred system is usually the one that is the cheapest in the area.
A wood structure roof system consists of laminated wood beams and girders that support the roof, with four- by eight-foot (1.2 by 2.4 m) wood and plywood panels. Two- by four-foot (0.6 by 1.2 m) or larger wood purloins are nailed to four- by eight-foot (1.2 by 2.4 m) plywood panels on the site and are lifted into place after the wood beam and girders are in place. This system is fast and economical and requires the least amount of materials.
Metal truss systems can be used to span the space between beams and walls. Plywood panels or metal panels form the roof deck. This system can provide larger bay spans than a wood structure. A metal panelized system can span the space between steel beams and girders. Manufactured metal panels are often used with preengineered wall and structure systems.
The connection between the roof and the parapet (the part of the wall that extends above the roof) is also critical. If the parapet is no taller than three feet (0.9 m), the roofing plies should wrap over the top of the parapet to prevent leaks. An alternative (though less recommended) method is to cast a reglet (the female part of a two-part sheet metal flashing that seals the roof to the building wall) into the wall about 18 inches (0.4 m) above the roof.
Skylights are becoming standard features in warehouses and can earn a project sustainability credits, such as LEED points, by reducing the need for artificial lighting. They can also save tenants enormous amounts of money on electricity. Some electrical companies give rebates or special credits to developers who install not only skylights but also photocells that turn off the electric lights when natural light is adequate to illuminate the facility. In addition to skylights, roof systems must include a roof hatch and ladder to permit roof drains to be cleaned and cleared, air conditioners to be maintained, and the roof to be inspected. Smoke hatches are also required to vent smoke from the building in case of fire. Requirements for sprinklers have also become more stringent in recent years.
BUILDING SYSTEMS. Power requirements have grown substantially for all industrial uses. Warehousing and manufacturing are becoming more automated; as a result, more machinery and high-tech equipment are needed, entailing a greater need for electrical power.
To support today’s power needs and to ensure the flexibility to adapt to tomorrow’s requirements, a building should be designed to accommodate both warehouse and manufacturing functions, which typically means 1,200 amps of 480/277-volt, three-phase, four-wire power. An underground conduit should be installed so that capacity can be increased if necessary to 2,000 to 2,400 amps by changing the transformer, pulling in cable, and boosting power without major construction costs. Additional power should not be installed at the beginning of construction, however, because it is expensive. The space for future expansion should be provided so that new power can be added when needed.
Increasingly, manufacturers require air conditioning or evaporative cooling, in part because today’s systems are more efficient and affordable than in the past. Though most warehouse and distribution facilities still do not require air conditioning unless they are handling perishable products, the buildings that serve warehouses may need to be air conditioned.
A big change in life safety systems is the introduction of early suppression, fast response (ESFR) equipment. Although traditional fire sprinkler systems react to a fire that is already burning and are designed to contain the blaze until the fire department arrives, ESFR systems can put the fire out, quickly. ESFR sprinkler heads react when they are exposed to 150°F (66°C) for only 30 seconds and then pour up to six times more water on the fire than older types of sprinklers. Adding ESFR systems to a building is expensive because the building structure and roof must be precisely configured to accommodate the spacing of sprinkler heads and to prevent interference with the water supply. However, ESFR remains the most cost-effective method of fire suppression and is often an owner/tenant requirement. One thing to consider is that ESFR cannot be used with clear height ceilings of greater than 40 feet (12 m). This constraint is another factor that has led to 40 feet of clear height as the upward limit for most warehouse buildings.
A metal building frame can be combined with tilt-up or brick-finished walls. These buildings typically involve the use of glass skins on the front and back facades and concrete panels on the sides to provide shear strength. Triple-layer insulating glass may be used to cut down noise near airports or industrial areas. Combining steel with tilt-up walls also saves money on steel. To construct these combinations, the prefabricated building is lifted onto the finished slab; anchor bolts in the slab must be located so that the walls can be fastened to the foundation. Roofing systems vary depending on the manufacturer. The better systems, which include insulation, can be designed to drain into gutters or over the sides of the building.
Interior finishes are more important for R&D/flex buildings than for other types of industrial space. R&D tenants value climate control and comfort; indeed, the developer should treat an R&D building more like office than industrial space.
If the activities in the laboratory or warehouse space generate noise, dust, or toxic fumes, safety features are critical. Air locks may be required to protect the office area from the lab area because a shared HVAC system would distribute unwanted dust or fumes throughout the entire building. By having two separate HVAC systems, a developer has the flexibility to seal off the laboratory area should future tenants require it.
The most frequent problems encountered in constructing industrial buildings concern drainage and roof leaks. A wall that is too thin or a column that is too small could lead to a sagging roof, which, over time, leads to leaks or roof failure.
Some other common mistakes to avoid during construction include
In St. Louis, 8610 Page Avenue, a renovation of a manufacturing facility (part of the Page Business Center), achieved LEED Gold certification for its core and shell. The renovation retained more than 90 percent of the building’s shell and used recycled and regional materials.
GREEN STREET DEVELOPMENT GROUP, LLC
• slabs that are not thick enough, causing a slab to be damaged by the crane;
• insufficient wall bracing, causing panels to fall over in high winds;
• failure to preplan the location of utilities under the slab;
• lack of a concrete area for truck and trailer storage;
• insufficient electrical service conduit (if the developer does not provide at least one extra conduit for future service, the slab and outside pavement may have to be torn up to install it later); and
• an undersized fire sprinkler system (if the system is inadequate, some prospective tenants may not be able to obtain fire insurance at competitive rates).
The market for the industrial space determines the type of construction and the quality of finishes. Cost-saving construction tips do not save money in the long run if they make a building less marketable. Industrial building techniques have been evolving more rapidly than those used for any other type of development. New materials and new systems technology often appear first in industrial structures. Beginning developers should avoid pioneering a new technique alone, but they should be familiar with current alternatives and should not fear innovation as long as experienced contractors and superintendents are working with them.
The considerations for financing industrial development are essentially the same as those for financing other income property (see chapter 4). Equity—from the developer or from others—is invested; interim construction money is borrowed until the project is completed and leased. When the project reaches stabilized occupancy as defined in the permanent mortgage agreement, the permanent mortgage takes out (replaces) the construction mortgage. For this last step, industrial property may have an advantage over other income property: some mortgage lenders believe that industrial development is a more stable investment because its market is less volatile than other markets.
The structure of the financing for business parks is likely to be more complex than that for individual buildings, especially if the developer plans to develop both the park and some or all of the buildings in it. Land development frequently involves more than one interim loan. Separate loans for land acquisition, land development, and building construction may be required. A building project, on the other hand, usually relies solely on a construction loan that also covers part of the land acquisition cost. Equity is required to pay for all predevelopment costs that occur before closing on the property because construction lenders will not fund construction loans before that event. After closing, equity is still required because loans rarely cover 100 percent of a project’s costs.
Construction financing is usually nonamortizing. Funds are drawn monthly to cover a percentage of the current project costs, including interest on the current loan balance. The developer submits draw requests to the construction lender based on construction completed to date. The lender’s inspector verifies that the work has been done, and then the lender transfers the money into the developer’s project account or provides a check directly to the vendors. The construction loan agreement specifies a deadline for repayment of principal, typically from 12 to 24 months for individual industrial buildings. When conditions for funding the permanent mortgage are met (usually based on the property’s producing a given amount of NOI for one or more months), proceeds from the permanent mortgage are used to pay off the construction loan.13
For business parks that combine land development with building development, funding of the permanent mortgage can occur after sufficient time has elapsed for lenders to evaluate a project’s track record. The completed project is appraised and a loan equal to 65 to 75 percent of the value given, based on payments that can be supported by existing and projected revenue. Alternatively, when a business park is partially occupied, the developer may use the cash flow from existing tenants to develop the remaining land, thus reducing the need for loans. When a building is sufficiently leased to support the debt service, the permanent lender will fund the long-term mortgage.
For industrial land acquisition and land development loans, a commercial bank usually takes the first lien position. It may finance up to 60 percent of the land value and 80 percent of the land development costs, depending on the appraisal of the completed improvements and projected sales revenues.
A real estate investment trust, opportunity fund, hedge fund, or private investor may take a secondary lien position or preferred equity, providing additional funds at rates typically five to six points above prime. For a second mortgage, an intercreditor agreement will usually be required.
Construction/lease-up financing is arranged for individual buildings or for the entire business park. Commercial banks are the primary sources for construction loans, usually at prime plus one or LIBOR plus 300, at 65 to70 percent loan to value and 75 to 80 percent loan to cost.
Developers should arrange permanent financing only if they plan to lease a building rather than sell it. If they plan to sell the building, permanent financing may hinder the sale if the mortgage has onerous prepayment conditions. Better financing may be available from the U.S. Small Business Administration or the buyer’s corporate banker. Permanent lenders look for the following items in evaluating loan requests:
• existing leases on the property, including lease rates, types of leases, and terms and provisions of the leases;
• financial capabilities and history of tenants; and
• general health of the rental market and how the leases compare with others in the market (if they are above market rates, tenants may leave; if they are below market, the property will have to be held a certain amount of time until the leases expire or rise to market levels).
Typically, industrial property must be 75 to 80 percent leased before a permanent lender will fund the mortgage. Permanent mortgages are typically 65 to 75 percent of value, subject to a debt service coverage ratio (NOI divided by annual debt service) of 1.25 to 1.3. At this writing, cap rates for single-tenant triple net leases on industrial buildings range from 7.5 to 9 percent for noncredit tenants and lower for credit tenants. The cap rate for multitenant buildings tends to be slightly higher.
Equity is always the most difficult piece of the financing puzzle to raise. Developers must use their own cash equity to fund predevelopment costs, due diligence, and other initial expenses. Beginning developers must usually look to family and friends to raise equity for their initial projects. Future tenants can also become partners in a project, an arrangement that provides equity, strength on the financial statement, and preleasing activity. Owners of private companies frequently prefer to own the property where their company operates. They may become joint venture partners, and their companies become building tenants.
Once a developer establishes a track record, institutional investors become a viable source of equity. Although some institutional investors limit their activities to prime office and retail properties, a number of them actively seek industrial properties and developers to form partnerships.
Institutional investors include pension funds, insurance companies, foundations, Wall Street funds, credit companies, and other entities that represent large pools of capital. They are distinguished from noninstitutional investors—primarily private investors—by their size and institutional character. In most cases, institutional investors act as fiduciaries for individuals, corporations, and other investors, large and small, that place their money with the institutions to invest on their behalf. Or, as in the case of insurance companies, they have funds to invest from policyholders or depositors representing many different accounts. Fund managers are likely to raise money directly or indirectly through Wall Street in public and private securities offerings.
Institutional investors play a larger role today in part due to the real estate crash of the late 1980s and the financial meltdown of 2008–2009. When money became scarce for any kind of real estate, institutional investors—especially vulture funds and investors searching for high-yield investments—were among the few buyers for the problem properties and loans.
Pension fund advisers like AEW Capital Management and Heitman introduced the concept of lookback returns in the 1980s as a means of protecting the rate of return they earned as the capital partner in joint ventures with developers. In their capacity as advisers, they act as investment managers on behalf of pension funds, endowment funds, and other institutional investors. The lookback return helps ensure that the developer—the operating partner—has an incentive to manage the property carefully and to spend money on maintaining the building because the great majority of his profit is not paid until the property is sold. A typical deal structure provides for the following priorities of cash flow distribution: (1) the return of capital, (2) a preferred return, (3) a lookback return to the capital partner, (4) an equivalent return to the operating partner, and (5) a split of the remaining profit.
At one time, it was common for operating partners to have no cash equity in the deal.14 Today, however, they typically have to invest some amount of their own balance sheet capital along with an equity capital partner. If the operating partner is required to invest 10 percent of the total equity required, his equity is treated the same as the capital partner’s equity for Priority 1, return of capital, and Priority 2, preferred return. This treatment, called pari passu, gives the operating partner’s equity the same status as the capital partner’s equity.
Tiered hurdle rates of return and promotes entered the developer’s lexicon in the early 1990s when Wall Street became a major source of capital. The word promote does not have a standard definition among real estate operators, but among institutional investors, it is defined as the difference between the operating partner’s capital contribution and his share of the profit.15
For example, if the operating partner puts up 10 percent of the capital in a 50/50 deal, then his equity is “promoted” by 40 percent. Basically, the equity is promoted to receive a disproportionate share of the returns. The promote is in essence compensation for sweat equity—putting the deal together and managing it. The amount of the promote becomes the first thing the capital partner asks (or demands)—the lower, the better.
Tiered hurdle rates of return provide a sliding scale under which the operating partner’s promote goes up as successively higher hurdle rates of return are achieved. For example, the operating partner may receive 20 percent and the capital partner 80 percent of the cash flow up to the point where the capital partner realizes, say, a 15 percent IRR. Once that is achieved, the operating partner’s share may go up to 30 percent and the capital partner’s share 70 percent up to the point where the capital partner receives a 20 percent IRR. Above that, the split may be 40/60 or 50/50. In this way, Wall Street ensures that the capital partners achieve high target rates of return—something that they were able to achieve during the tight capital market of the early 1990s. As the real estate capital market normalized in the mid-1990s, Wall Street and other institutional capital providers were less able to demand very high tiered rates of return in excess of 20 percent, but the basic approach has endured to become a common deal structure with institutional partners.
AllianceFlorida at Cecil Commerce Center in Jacksonville, Florida, was developed by a public/private partnership to transform the NAS Cecil Field into a 6,400-acre (2,600 ha) multimodal industrial park.
WESLEY LESTER, CITY OF JACKSONVILLE
The major deal points in joint ventures with institutional financial partners can be boiled down to nine main issues: (1) the operating partner’s cash equity, (2) the preferred return, (3) profit share, (4) lookback return, (5) pari passu equity payback, (6) guarantees, (7) management control, (8) fees to the operating partner, and (9) fees to the institutional partner. Tradeoffs are possible among the different deal points, and the best choice for the operating partner depends on his needs and priorities. It is a mistake, however, to focus on the operating partner’s share of the profit because his actual return depends more on the investor’s preferences and lookback returns and the priorities of payback than on the profit split. The only way to calculate the partners’ expected returns is to model the deal and to compute the operating partner’s return and capital partner’s return under different cash flow scenarios.16
The negotiation over major deal points primarily concerns allocating risk—who takes what risk? The institutional investor tries to shift as much risk as possible to the operating partner, and vice versa.
DEAL SIZE AND FLOW. One important issue is future deal flow. Companies that generally would not consider a deal below a certain amount may consider it when the deal initiates a new relationship with an operating partner who can generate many more deals. The prospect of a steady flow of business from a major local developer makes the effort worthwhile.
CLAWBACK. Another important issue is the pooling of deals with an operating partner. Charles Wu says that Charlesbank Capital Partners insists that all deals with a single operating partner be pooled and subject to a clawback. A clawback gives the financial partner the ability to reclaim profits paid to the operating partner in one deal if a subsequent deal performs poorly. Without the pooling, Wu says, “the operating partner has an incentive to ‘swing for the fences’ every time, because he gets the promote on good deals while Charlesbank eats the losses on the bad deals.”17
In arrangements involving pools of property with one operating partner, Charlesbank arranges an amount of money for the operating partner to invest over a two-year period called a program. The pool of properties subject to the clawback is determined by the size of the program. For example, the program may call for Charlesbank to fund, say, $30 million in equity over two years. If the full $30 million has not been invested within two years, the program duration may be extended or a new pool may be started. The operating partner would prefer to start a new pool immediately to limit the properties subject to the clawback.
DEAD DEAL COST. Another important deal point is the dead deal cost—what happens when money is spent chasing an acquisition that does not go through. Due diligence costs on a major purchase can easily run up to $100,000. Who should bear the loss? One would expect that if the financial partner puts up 75 percent of the cost, he should bear 75 percent of the loss. Charlesbank, however, requires the operating partner to pay two-thirds of any dead deal costs because it wants the operating partner to be careful with the money spent looking for deals.
CONTROL. Among the major deal points, control is perhaps the most important. Financial partners have learned that the hardest part of correcting a problem property is often getting control of the asset. The buy/sell clause is intended to deal with this risk. “Capital partners love the clause; operating partners hate it,” according to Wu.18 The operating partner is concerned that the capital partner will activate the buy/sell clause at a time when capital is scarce and will steal the deal from the operating partner. The capital partner is concerned that the operating partner has much more information than he has. He may trigger a buy/sell knowing that a major tenant has decided to leave or that one is about to be signed. The operating partner’s protection that the buy/sell clause will not be used indiscriminately is the financial partner’s reputation for using them rarely.
The operating partner is naturally concerned about the events that will allow the financial partner to take over control and wants to avoid a situation where the financial partner takes over merely when the property is performing poorly. John Williams says that Acacia Capital does not create economic defaults whereby a property is in default if it is less than, say, 90 percent occupied at rents of $15 per square foot per month ($161/m2/month). But it wants to be able to insist that necessary capital improvements such as a new roof are being made. In Acacia’s buy/sell agreement, the party that buys the property has 60 days to close—enough time for the operating partner to raise the cash. If he cannot close at the buy/sell price, however, the other party can buy him out at 80 percent of the price.19
CROSS COLLATERALIZATION. Lenders like to cross collateralize properties; developers do not. If a lender is not getting paid on one property, it can foreclose on other cross collateralized properties to satisfy any deficit—which of course puts other properties at risk. Because they hold an equity position with the operating partner in their deals, institutional investors like Acacia do not like to see cross collateralization on permanent loans.
LOCKOUT AND PREPAYMENT PROVISIONS.
Lockout and prepayment provisions prevent the borrower on a mortgage from paying it off within a given time, usually the first two years. Thereafter, the loan is usually subject to a yield maintenance or defeasance prepayment. Lockouts and prepayments are particularly unpopular with operating partners because they prevent or restrict the operating partners from refinancing a property to pull out some or all of their equity. Unfortunately, lockouts and prepayments are a common—almost required—provision in conduit loans from Wall Street. Conduits represent an increasingly large source of mortgage capital funds, including mortgages originated by banks and mortgage brokers. Conduits originate capital through mortgage brokers and other mortgage originators under predefined terms. The mortgages are aggregated and sold to investors in the CMBS market.
Figure A presents a deal structure with a three-tier hurdle rate of return. To simplify the illustration, the investor puts up all the equity—$100,000. (If the operating partner puts up part of the equity, the total cash flow for each tier would not change, assuming that total equity remains $100,000. The cash flows to the investor would simply be divided between the capital partner and the developer in proportion to their share of the $100,000 total equity.) Out of initial cash flows, the investor receives his money back and a 10 percent cumulative preferred return on all unreturned equity. After he receives the preferred return (because it is cumulative, it is accrued if cash is unavailable in the current year to pay it), profits are split 80/20 (with the investor receiving 80 percent) up until he receives a 15 percent IRR on all cash invested. For undistributed cash above a 15 percent IRR and less than a 20 percent IRR to the investor, the profit split is 70/30. After the investor receives a 20 percent IRR, profit above that is split 50/50.
Figure B shows the computations and resulting cash flows for this deal. The overall IRR is 38.8 percent on the initial $100,000 investment. Positive cash flows total $290,000, for a net total of $190,000. Line 10 in figure B shows that after the equity and 10 percent preferred return are paid, a cash flow of $161,900 is available for distribution. The first-tier distribution (line 16) gives the investor 80 percent of the cash flow up to a 15 percent IRR, which is $17,533 ($9,520 in Year 2 and $8,013 in Year 3).
Line 29 in figure B computes the cash flows required to give the investor the Tier 2 hurdle of 20 percent IRR. Because the totals for Years 1 and 2 consume all the available cash, the total to the investor for those years (line 30) does not change. The shortfall at the end of Year 3 of $25,180 plus 20 percent interest, however, gives a required payoff amount of $30,216. The investor has already been allocated $8,013 from Tier 1, leaving a balance of $22,203. The total cash flows to the investor that give him a 20 percent IRR appear in line 38.
FIGURE A | Three-Tier Hurdle Rate of Return
Line 43 shows that after paying the investor $30,216 and the operating partner $11,519 in Year 4 for Tiers 1 and 2 combined, a balance of $108,265 is still available for distribution in Tier 3. Because the deal structure gives the operating partner 50 percent of the profit above 20 percent IRR, the $108,265 is divided 50/50.
The first-tier distribution gives the investor 80 percent of the cash flow up to a 15 percent IRR (line 17), which amounts to $17,533 ($9,520 in Year 2 and $8,013 in Year 3). The second tier gives the investor 70 percent of the cash flow up to a 20 percent IRR, which amounts to an additional $22,203 (the second-tier IRR is computed in line 47). The final IRR for the investor on all three tiers of cash flow is 29.6 percent (line 49) on total cash flows of $121,969.
The operating partner’s IRR is infinite. His total cash is $68,031. Note that the sum of $121,969 and $68,031 for the investor and the operating partner equals the total cash flow available (line 2) of $190,000.
In this illustration, the operating partner receives his profit share concurrently with the capital partner—a pari passu arrangement in which the operating partner’s equity is treated exactly like the capital partner’s equity. They thus receive the same hurdle rates of return and priority to distribution of cash flow. In a non-pari passu arrangement, the lookback return gives the investors all the profit up until they receive the hurdle IRR for that tier. After that occurrence, the operating partner receives his share of the profit for that tier. This construction places the financial partner ahead of the operating partner in receiving any share of the profit.
FIGURE B | Lookback Return with Sliding Profit Split
Lockout and prepayment provisions are popular for CMBS investors because they ensure that the underlying mortgages will not be paid off early, thus providing an assured period of return to the investor at the interest rate on the CMBS bond. In portfolio purchases of multiple buildings, lockout and prepayment provisions are often unacceptable to the operating partner, who may want to sell off individual buildings to finance the rest of the transaction. If the borrower were to sell the individual buildings, he would need to retire their mortgages (which by contract are not assumable)—an event prevented by the lockout.
STRATEGY AND REPLACEMENT COST. Capital partners focus on the acquisition strategy for any pool of investments. Currently, the most popular strategy is buying properties at prices well below replacement cost. Investors reason that no new product will be built until rents reach a level that supports new building construction. As long as properties are being acquired below replacement cost, those investors have an advantage compared with new building owners, as they can profit at lower rents. When the purchase price is equal to replacement cost, there is no advantage over new buildings and the higher target yields are not likely to be attainable. Strategies that work under certain market conditions are not appropriate when conditions change.
Marketing an industrial project is a multistep process that revolves around creating an identity or niche for the development, identifying target users, convincing them that the space meets their needs, and negotiating the terms of the lease or sale.
Industrial developers should start approaching potential tenants as soon as they option a site or consider developing a site already in inventory. A low-key but directed approach that takes advantage of informal contacts often works best. Targeted firms may range from major national companies to regional firms to local firms to any combination of the three. If a high-quality company is attracted to the site at the outset, it will help launch the development; the initial tenant’s prestige sets the tone for the rest of the project. Developers usually begin the marketing campaign by exploiting their existing contacts, but they should also contact key brokers for leads on possible seed tenants. When a project is still in the conceptual stage, the developers will have to persuade initial tenants that the future building will suit their needs.
As development progresses, other aspects of the marketing program should advance, including creating a marketing plan, establishing a budget, preparing marketing materials, and creating a leasing program through in-house resources or with external real estate brokers. The strategy and the tone set in marketing materials must reflect the goals of the developers and target the types of tenants indicated by the detailed market analysis. Care must be taken to avoid excessive and unnecessary costs for advertising and promotion.
Local brokers are often the best source of market information because they know who specific tenants are likely to be. Prospective tenants seeking more space or different space often come from adjacent properties. Local chambers of commerce also may provide leads or find potential tenants for a project.
Beginning developers can sometimes turn their lack of experience into an advantage for marketing purposes. Small developers can claim more hands-on involvement and can give more personal attention to tenants. Their costs tend to be lower because they have lower overhead than large, established development firms.
A successful marketing program requires a clear strategy addressing what the developer is seeking in terms of types and sizes of tenants, rental rates, lease terms and conditions, and the length of the lease-up period. Marketing goals should be grounded in the realities of the marketplace as determined by market analysis and any subsequent changes in supply, demand, and the competition. They must also reflect the business objectives of the owners and investors. For example, depending on their exit strategy, some investors might prefer to emphasize short-term value and thus rapid lease-up, whereas others might prefer to hold out for opportunities for longer leases or institutional-quality tenants that can add prestige and value when the project is sold.
A first-year marketing budget generally ranges from 4 to 5 percent of a proposed project’s anticipated gross revenues. The developer should keep in mind that the entire marketing budget must be adequate to cover the entire marketing period, not just the flurry of marketing activity that usually accompanies a project’s opening.
Although the major elements of a marketing program for an industrial development are fairly straightforward, it can be difficult to come up with a hard and fast estimate of its costs early in the development process. A rough estimate can be made by compiling a comprehensive list of possible marketing activities and preparing a reasonable cost estimate for each item. The compensation scheme for marketing agents and the degree of reliance on outside brokers are important variables in marketing costs, although fees for agents and brokers are typically separate line items in the budget.
Two documents are essential to a successful marketing program: a technical services package and a sales brochure. The following discussion applies primarily to full-scale business parks, but developers of individual buildings should also have similar information available for prospective tenants.
TECHNICAL SERVICES PACKAGE. The developer gives the technical services package to brokers. The package consists of statistical data describing the project’s target market and includes information relating to population growth and other demographic statistics, statutory taxes, real estate taxes, sales taxes, interstate commerce trucking zones and rates, and public services. The package should also include information about utilities, such as typical water and sewer dimensions, capacity, static pressure, and design flows, as well as information on fire protection services and requirements, electrical capacity, and the name and frequency of the rail carrier, if any. The technical services package also addresses
• details of protective covenants;
• development constraints, including setbacks, landscaping requirements, and exterior building materials;
• procedures for architectural approvals for tenant-built structures;
• locations of and requirements for parking and service areas;
• location and design of signage;
• permitted and nonpermitted uses;
• storage requirements; and
• procedures for dealing with objectionable situations, such as noise, odors, vibrations, and smoke.
All procedures should be explained in a positive manner. It should be clear to prospective tenants that the restrictions will benefit their property and the overall character of the industrial park. The information may be summarized in a small pamphlet that the broker can give to potential clients.
THE WEBSITE AND SALES BROCHURE. The website and sales brochure describe the ownership, location, and distinctive features of the project. Usually prepared with the help of a public relations or advertising firm, websites may feature short videos, animations, and other rich media in addition to standard information about the project. Brochures usually consist of a pocketed folder with single-page literature in the pockets. This design allows the contents to be updated without completely revising and reprinting the brochure. The sales brochure should include the following information:
• the developer/owner’s and manager’s track record, with information on previous projects;
• a list of anchor tenants;
• the overall development plan that identifies the preliminary parcel configuration and proposed road network;
• technical building information;
• relevant site data, including information on utilities and infrastructure;
• a location map showing the relationship of the project to the region, immediate community, and road and rail networks;
• a detailed map showing access to the site and the immediate neighborhood; and
• a summary of community characteristics drawn from the market studies and other sources.
The quality and thus the cost of the brochure needed for successful marketing vary from place to place. In intensely competitive markets and for projects that the developer wishes to position as first class, more expensive four-color glossy presentations are warranted. In less competitive markets, black-and-white brochures may suffice.
Whether the developer should sign an exclusive arrangement with a broker depends on local practice. In some communities, exclusive arrangements are essential for gaining the necessary attention of any one brokerage firm, especially for smaller projects. In other communities, such arrangements are harmful, as they encourage other brokers to steer clients away from the project. In markets where competitive brokerage activity is strong, another method may be to collaborate with the local brokerage community through an open listing. Because this system involves no formal agreements between developer and broker, it is important to keep brokers informed about the project and assure them that they will receive fair and timely financial remuneration for closing transactions.
Industrial brokers’ commissions are typically calculated as a percentage of rental income. Rental income is specified in the lease and can be defined as net rent, rent plus expenses, and rent plus a portion or all of the fully amortized tenant improvements. Generally, the commission structure calls for a declining percentage of income for the later years of a lease term, usually after the fifth year. Half the amount is paid when the lease is signed and half when the tenant moves in.
Any exclusive arrangement should hold the broker accountable for promotion and sales. Inquiries from clients, direct contacts, sales presentations, and other activities should be monitored monthly.
Leads for prospects can come from a number of sources. Developers should hold regular meetings or lunches with the brokerage community to keep brokers informed of new developments, modified pricing, and current sales or leases, and they should offer regular tours. Developers should send brochures to clients, industry contacts, and brokers known to them in other communities in the region. And they should maintain close contact with local and state economic development agencies, public departments in the community, utilities and railroads, planning commissions, and redevelopment agencies. Advertising usually requires a steady, consistent marketing program to keep the project in the public’s mind.
Prospective industrial tenants focus on three major concerns: effective rent, location, and building design (especially loading areas) and amenities.
Tenants ultimately focus on the effective rent—their costs per square foot after all concessions have been taken into account (see chapter 5). In multitenant R&D buildings, tenants focus on the costs shared with other tenants. Leases for single-tenant buildings are typically triple net or net-net. In the case of triple net leases, the tenant takes care of everything; for net-net leases, the landlord is responsible for maintaining the structure of the building—the foundations, the walls, and the roof.20 Leases in multitenant buildings typically provide for gross rent; they resemble those for office buildings in which the landlord is responsible for building operations.
Individual tenant spaces are generally metered separately so that each tenant pays its own utilities. In addition, each tenant pays its share of common area expenses, which are allocated based on square footage. In tight markets, the developer can usually negotiate annual increases in rent based on the consumer price index. Lease terms typically range from three to five years, although two-year terms are not uncommon.
Holladay Properties developed Ameriplex in Nashville, Tennessee. (See case study at the end of this chapter.)
HOLLADAY PROPERTIES
Tenant improvement allowances for office space in industrial facilities vary according to building type. The allowance is usually a small amount, say, a $15 per square foot ($160/m2), which the tenant can supplement if it wants.
Industrial developers should try to avoid certain clauses in their lease agreements:
• Clauses that require developers to rebuild the building in the event of an uninsured loss are less desirable than those that provide the option to terminate the lease.
• Rights to renew leases should be limited. Every tenant wants a five-year option to renew a five-year lease with preset ceilings on increases in rental rates.
• Rights to expand into adjacent space should be limited. Small tenants may be refused such rights altogether. Developers may give a right of first refusal to large tenants when space becomes available.
• Developers should never agree to hold space vacant by giving an unqualified right to expand into new space after a certain number of years (for example, 40,000 square feet [3,720 m2] now, 20,000 square feet [1,860 m2] more in five years). If a compromise must be made, developers may agree not to lease a certain space for more than a three- or five-year term. If the parties agree to such a constraint on a particular space, however, finding a tenant for that space may be difficult. For example, if the tenant in the expansion space signs a three-year lease with a two-year option, the space may need to be held vacant for the last two years.
• Short-term leases (say, for only two years) and options to terminate a lease for any reason may make financing difficult, if not impossible. Major tenants often want a right to terminate the lease if a condemnation takes place or if access to the property is impaired.
• In California, smart lessees try to negotiate a limit on tax increases so that, if the building is sold, the tenant does not pay the increase in taxes that occurs automatically under Proposition 13. A possible compromise is to limit the number of sales in a ten-year period that can raise the tenant’s property taxes.
David Hasbrouck, executive vice president of Cushman & Wakefield, Inc., in Los Angeles says that landlords have become much savvier in recent years. “They do not want to pay a broker on lease options now. It has created a lot of problems in the past, especially on long-term leases with options. A tenant representative has to be very careful. There has been a shift to NNN leases with landlord-specific forms, especially for newer buildings. A tenant has to pay for everything on a NNN lease. They may not have protection against an increase in tax and insurance bases as the result of a sale. Even on a gross lease, a tenant may have to pay an impound for a change in tax basis.”21
Izzy Eichenstein, CEO of the Oakstone Company in Los Angeles, points out that many industrial tenants lease older buildings. One of the favorite clauses for landlords in this case is as-is condition. Tenants have to be very careful because maintenance of older buildings can be costly. “Lease forms have changed considerably over the last ten years. Both tenants and landlords take much more care about leases now—but mistakes still happen.”22
Industrial developers have become much more proactive in the management of their buildings and business parks in recent years. This attention is in response to increasingly complex operation of industrial real estate and greater concern about long-term value.
Management of industrial properties involves three stages. Priorities change during each stage.
During the development phase, the developer’s major tasks are to coordinate the installation of infrastructure and to attract seed tenants. Often, the local community is concerned about environmental issues, and, to promote the project, the developer also must display such concern. Restrictive covenants not only protect the project but also help to reassure the community that potential undesirable side effects will not be permitted.
Because of noise, dirt, and increased traffic during the development phase, the developer must foster the image of a good neighbor. Failure to respond to the community’s concerns can result in time-consuming delays in approvals and inspections. On-site management is a necessity. Timely completion of infrastructure is vitally important to the seed tenant—the one that establishes an overall identity for the project. If seed tenants encounter delays in occupancy because of poor management, they are likely to convey their dissatisfaction to other potential tenants.
Management during the lease-up stage emphasizes the selection of tenants, tenant relations, enforcement of standards, and the maintenance of the project’s public image. Although the preliminary parceling of the property is the basis for marketing individual sites, the developer should still maintain flexibility. The principal concerns of the developer during this stage revolve around the compatibility of potential tenants, their locational relationships, and parceling.
The seed tenant sets the standards for the rest of the tenants. If the first tenant occupies 10,000 square feet (930 m2) of space, subsequent tenants tend to occupy the same amount of space. If the seed tenant occupies 100,000 square feet (9,300 m2), many subsequent tenants will occupy at least 50,000 square feet (4,650 m2).
Site planning and the design of individual buildings are critical elements in maintaining the project’s marketing appeal. The enforcement of restrictions on architecture, outdoor storage, and loading and parking ensures the project’s continuing marketability. The developer should enforce the standards equally and impartially. Close supervision of architectural standards and especially exterior yard controls facilitates the financing of the project during its mature stages.
Shell buildings and multitenant spaces in partially occupied buildings can remain empty for months. If such buildings are not properly cared for (for instance, if construction rubble is not removed and landscaping is not maintained), they can become unsightly nuisances that lower the value of neighboring property and give the impression of poor management. Developers who lease or sell land to other builders can avoid the problem of unsightly vacant buildings by requiring builders to post a performance bond to ensure conformity to CC&Rs and design controls within a specified period of time. The bond should require that
• exterior walls are finished and the installation of windows and doors is completed;
• all driveways, walks, parking lots, and truck-loading areas are paved;
• all construction debris is removed;
• the landscaping, including trees and shrubs planted in specified locations and sod installed, is completed and irrigation systems provided; and
• landscaped areas and parking areas are well maintained.
The major objective during Stage 3 is to maximize long-term profitability. Revenues, infrastructure costs, and operating expense projections should be updated quarterly, or at least annually. Financial management tasks include cost accounting, pricing, and keeping track of new leasing and sales information, which should cover details about prospects, broker contacts, telephone inquiries, rental rates and available space of competitive projects, and current tenants’ lease renewal dates.
The mature stage of a project occurs after it has been completely leased out or sold. Management of the completed development and enforcement of restrictive covenants are turned over to an occupants association, similar to a homeowners association. If the association is voluntary, it can be created as the developer phases out the project. If it is a mandatory association, it must be established at the beginning of the development so that all tenants and purchasers are bound by its provisions.
The 1.6 million-square-foot (149,000 m2) Whirlpool Distribution Center at Rickenbacker West in Columbus, Ohio, was developed by a public/private partnership involving the city of Columbus, the Pizzuti Companies, and Whirlpool.
GLAVAN FEHéR ARCHITECTS INC.
Associations can be a source of problems and expense for the developer if they become a means for occupants to press for services or benefits to which they are not entitled. Notwithstanding these concerns, a well-run association benefits not only the tenants and the community but also the developer’s reputation by maintaining the standards of the project over time.
The main source of concern for developers during this third stage is the “residuals”—the future proceeds from the sale of buildings developed and any remaining unsold parcels. The developer plays the same role in the association as other owners: if they own buildings with triple net leases, they should inspect the property at least semiannually. These inspections are important for determining
• how well the building is maintained;
• problems of functional obsolescence;
• the existence of restricted activities, such as the storage or manufacture of items outside buildings;
• the existence of potential problems or liabilities resulting from toxic waste; and
• the health and well-being of tenants and whether their operations are growing, maturing, or diminishing.
Various new concerns also bedevil the owners of industrial properties. For instance, in earthquake-prone areas, masonry property built before 1934 must be reinforced with steel. Dealing with tax reappraisals on existing property and trying to work out mistakes on tax bills can consume enormous amounts of an owner’s time. Leaking oil tanks on properties several hundred yards away can contaminate groundwater, making it difficult to refinance nearby properties. Defense contractors insist on four-month escape clauses from leases because they do not know whether their contracts with the federal government will be extended. All such concerns demand developers’ increasing attention during the operating phase of a project.
Property management for an industrial development varies considerably depending on the building type and whether it is single tenant or multitenant. Covenants play an extremely important role for maintaining a high-quality appearance. Rules with respect to on-site storage, parking, and truck parking and loading areas are just as important as landscape maintenance and trash pickup. Truck parking in older industrial areas can create serious problems, especially if residences are nearby and the trucks impede traffic flow. If loading bays face the street, longer trucks may protrude into the street. This condition will cause continuing headaches for the owner who must contend with parking tickets and constant complaints from neighbors.
Many single-tenant buildings have triple net leases that have no provisions for an on-site property manager. Even though a lease provides for cleaning up the property and properly disposing of hazardous wastes and other sources of contamination, the owner should inspect the property regularly to ensure clean and safe storage practices.
The disposition of industrial properties follows a procedure similar to that for office and retail buildings. The developer can emphasize a number of features to potential buyers:
• the building’s functionality;
• the building’s adaptability;
• the site’s locational attributes;
• tenants’ reliability and financial strength;
• the project’s financial characteristics; and
• the project’s future prospects.
Many industrial developers prefer to sell occupied buildings with ten-year leases during the fourth year, just before the rent steps up in the fifth year. Before that time, the rent is often so low that buyers will not pay enough for the building. In competitive markets, industrial buildings often do not become profitable until after the first increase in rents. Although sales brokers ask for the scheduled commission, commissions are usually negotiable. Smaller developers will probably have to pay higher commissions to obtain the same amount of attention from brokers as that given to larger developers who can offer more business.
Mounting concerns over toxic waste and asbestos make the sale of industrial projects more and more difficult. If the project has any kind of maintenance or fueling facility where petroleum products or chemicals collect, it will probably have to be cleaned up before it can be sold. Although everyone in the chain of title has liability for cleanup, the owner is ultimately responsible. Even though the owner may be able to recover cleanup costs from the tenant, cleanup should be done expeditiously.
Warehouses are far from glamorous, but good reasons exist for developing and investing in industrial facilities. They generally take far less time to build than mid- or high-rise office structures, and, as a result, developers can respond quickly to economic downturns. Moreover, warehouses and flex space become attractive affordable office locations in tight markets. The flexibility of industrial space appeals to a wide range of small business, from light manufacturing to storage to office uses.
Industrial space has other advantages as well: capital expenditures are lower than for other product types, especially office space, and industrial property has a lower ratio of operating expenses to revenue—which means that it will perform better in up markets because more income drops to the bottom line.
Certain trends will influence industrial development in the coming years:
• The push toward greater efficiencies in logistics is leading to the consolidation of distribution centers into larger and more complex regional distribution and warehouse centers, and this trend is lessening each user’s total square-footage requirements.
• The traditional role of landlord will change as tenants demand more services to run their businesses efficiently.
• Demand for high-speed connectivity and the ability to accommodate the latest technology will favor developers who build flexibility into their projects to allow for future wiring and other needs.
• The need to control tenants will make in-house management increasingly important to retain incubator tenants.
• Lower current yields will require developers to leave more equity in their projects.
• The entitlement process, which is becoming much more rigorous, will make the cost of improved land much higher; longer approval times will cause carrying costs to increase, and public exactions and development fees will raise the cost of obtaining entitlements.
• The use of nonunion contractors in most areas will be necessary to hold down costs and maintain competitiveness.
Beginning developers will continue to have many opportunities in the future, but they will have to choose their market niches carefully. Beginning developers will need to know the market well enough to identify those areas that are inadequately served by their experienced competitors, and they must be ready to pursue those opportunities aggressively.
The Nashville office of Holladay Properties was founded as a satellite office in 1986. Tom Gibson, the local Holladay partner, was familiar with industrial development from working as a leasing agent and developer in Holladay’s Indiana office. The Elm Hill Pike industrial corridor in Nashville is located midway between downtown and the airport. Historically, this submarket was one of the stronger industrial areas in the Nashville metropolitan statistical area. Over the years, Holladay had developed several projects in this area:
• In 1986, Holladay developed the Fesslers Lane Business Park and two office flex projects in that development.
• In 2006, Holladay purchased a property along Elm Hill Pike and redeveloped the building for Gibson Guitar’s custom manufacturing plant.
• In 2008, a second 171,000-square-foot (16,000 m2) building in this area was purchased and rehabilitated for a local candy company.
A U.K.-based holding company owned 35 acres (14 ha) behind the Gibson building. The same broker that represented Holladay in the Gibson transaction had listed the site. After much negotiation, the property was put under contract at $1,050,000 with a 90-day due diligence period, with an opportunity to extend the due diligence for an additional 60 days. Holladay had extensive knowledge of the property. The reason this site was still available was it had a number of difficult development issues. The property had severe topography; was located next to Mill Creek, which was home to the endangered Nashville crayfish; and was bordered by a gasoline pipeline. The site had a sinkhole, and areas of the site had been filled over the years with suspect material. After a good bit of back and forth, the contract was executed in April 2007.
FIGURE A | Project Market Cycle Analysis
Work immediately commenced on the due diligence process. An architect and geotechnical and environmental consultants were hired. The architect developed a preliminary site plan for two 100,000-square-foot (9,300 m2) buildings at the top of the site with a shared service court. An additional 80,000-square-foot (7,400 m2) building would be located at the bottom of the site. This site plan seemed to be fairly efficient and functional. The site had two access points: one was an easement through the Gibson Guitar property and the other was an owned access off Elm Hill Pike. The owned access was a combination of commercial and ten-unit-per-acre (R-10) residential zoning. The plat clearly stated that grading was permitted through this area for an access road.
The geotechnical consultant suggested that Holladay do a series of borings at the top and bottom of the site and dig test pits. Since the site was heavily wooded, it required heavy machinery to cut paths for the geotechnical crews. These same paths would also need to be used to verify topographic information. The city’s aerial topographic maps were used for the initial studies. This information was dated and the accuracy of the data needed to be verified.
The due diligence team turned up a number of issues that were of concern:
• The test pits showed a large area on the site that had been filled. The test pits revealed that the fill was a combination of topsoil, rock, and organics, and this material was unsuitable to support a structure.
• There was a slight depression in the northwestern corner of the site that was labeled wetlands. The environmental consultant believed that this area was not wetlands but would have to get an opinion from the Tennessee Department of Environment and Conservation (TDEC) and the Army Corps of Engineers.
• A former streambed ran through the site. This stream had been cut by municipal sewer work and a gasoline pipeline. As a consequence, it was the due diligence team’s opinion that it was merely site drainage and not a blue-line stream. This opinion would, however, need to be reviewed by state authorities.
• There was a sinkhole at the southeastern corner of the site that fed into Mill Creek, which was habitat for the endangered Nashville crayfish.
• The sinkhole issue was the least disturbing as this area was intended for Phase III of the development. It would, however, affect the ability to balance the site because no blasting was allowed to mine limestone for fill material. The issues that needed immediate attention were the wetlands and the blue-line stream.
The development team tried to track all these items simultaneously. These issues were also disclosed to the seller and an extension of the due diligence period was negotiated.
The site layout continued its evolution as TDEC negotiations continued. The geotechnical consultant indicated that approximately 20,000 cubic yards (15,300 m3) of bad fill material would have to be moved and replaced. A number of options were evaluated, including reconfiguring the building to a U shape, completing the original design with a floating slab and surcharging the site by adding good soil.
An updated analysis of the market was prepared that demonstrated that the project would hit a “sweet spot” in the Elm Hill Pike submarket. The overall industrial market consisted of 160 million square feet (14 million m2). Ameriplex’s submarket consisted of 14 million square feet (1.3 million m2) with a 4 percent vacancy rate. Market rents for upscale office warehouse space were $4.50 per square foot ($48.50/ha) for warehouse and $11 to $11.50 ($118–124/ha) for office space. The market research indicated that there was a pent-up demand for 10,000- to 60,000-square-foot (920–5,600 m2) spaces. Market cycle analysis and submarket information demonstrates that demand, rents, and occupancy were favorable for a project of this type (see figure A).
The development team felt they could gain a market advantage if the project was the first industrial LEED project in Nashville. They believed the LEED concepts would be attractive to both local and national tenants. National tenants appreciated the PR value of being in a green building. LEED was to be marketed to local tenants on the added value achieved in total occupancy costs savings. The marketing team would demonstrate that the total occupancy costs would be lower due to the design features of the building, which would include
• solar lighting on the roadway to the project;
• programmed, dimmable, high-efficiency exterior lights;
• sustainable landscaping that does not require maintenance or mowing;
• a water retention system that captures water from the roof to use for irrigation in lieu of purchasing water from the city for this purpose;
• added insulation in the building;
• motion sensor controls on high-intensity interior lighting;
• permeable concrete paving that allows water to go directly into the groundwater, reducing the need for expensive on site detention; and
• daylighting wall panels in the warehouse that reduce the need for artificial interior lighting.
Based on the initial projections, Holladay estimated that tenants could be offered occupancy savings of $0.25 to $0.30 per square foot ($2.69–$3.23/ m2) per year by virtue of the buildings’ LEED features. When this savings was combined with the other functional design features, the development team believed the project was economically sound. Other significant building features included
• 24-foot (7.3 m) minimum clear ceiling height;
• ample truck dock court; and
• abundant surface parking.
ENTITLEMENTS
The site was zoned IR (Industrial Restrictive) except for one small section, which was a part of the owned access. The plat clearly stated that no grading could be done in this area, with the exception of an access road. Holladay’s consultants believed that the access road going through R-10 would not be a problem because it was not prohibited under R-10 zoning and was called out on the plat. Unfortunately, when the final building plans were submitted to the city, Holladay was informed that although roadways were permitted in R-10, a commercial drive, as a matter of policy, was not permitted in R-10 and this portion of the property would need to be rezoned. A meeting was immediately set with a public relations consultant to strategize about how to approach this rezoning appropriately. The property bordered a lower-middle-class residential neighborhood, and Holladay wanted to be certain to approach the community in a politically correct fashion. The public relations consultant provided background information on the local councilman and developed a communications plan for presenting project information to the neighborhood.
A meeting was arranged with the councilman, and he was given an overview of similar developments that Holladay had completed elsewhere in the country. The councilman was informed that as a matter of right the secondary access and the remainder of the property could be used for a number of uses that would be far less aesthetically pleasing and would be more objectionable than a LEED-certified office warehouse. The councilman suggested that a specific use zoning be pursued, as it would assure the neighborhood residents that the rezoning would be specific to the use and plan that was submitted for approval. This suggestion proved to be very helpful. Holladay commenced writing letters to all the residents in the neighborhood that had to be notified according to statute. The letters were followed up by canvassing the neighborhood to explain the project and the proposed development. A public meeting was subsequently held at a neighborhood middle school at which the development team gave a PowerPoint presentation on Holladay’s résumé and the project.
The neighborhood residents were concerned with lighting and security. The neighbors were assured that lighting would be minimal and that energy-efficient, dimmable fixtures would be installed along the roadway to further reduce the level of lighting during those times when lighting was not necessary for vehicular traffic. They also expressed concern about security and were informed that Holladay planned a card-accessed, gated development, which placated their concerns. Due to the approach taken, the rezoning went smoothly and it was approved without opposition.
PRECONSTRUCTION
After review of various plans, the development team decided to proceed with the original concept, which called for two buildings with a common service court.
Holladay still had to sort through several environmental issues on the lower portion of the site, but any developable ground in this area would not affect the feasibility of the project. The ten acres of land along Mill Creek were effectively the hidden asset.
A number of site-work contractors were interviewed and asked to review the preliminary plans and provide estimates and value engineering ideas for the grading plan. Summit Constructors was a contractor that proved to be the most creative. Summit was selected and the development team worked diligently with the firm on the final grading plan. Summit’s team suggested that, in lieu of expensive footings, the bad fill could be excavated, sorted, and reused as acceptable to the geotechnical engineers, thus substantially reducing the costs associated with this issue. They also suggested that some of the bad fill material could be used on slopes and other areas to avoid the expense of hauling off surplus material. The civil engineer initially designed the site utilities with two waterlines. Summit suggested a single large waterline with a “T” would be more cost-effective. Monitoring plates were put under the topsoil and when they showed no movement, the topsoil could be removed or sold. This process prevented a very expensive footing system or the need to import shot rock fill.
The development team then proceeded to meet with several general contractors and commenced bidding the construction of the building shell. They solicited value engineering ideas from three contractors and implemented those that would reduce cost without affecting the quality of the project. One general contractor had an in-house structural engineering department that proved to be very helpful, suggesting that the steel requirements could be minimized if some of the load-bearing elements were shifted to the tilt-up walls.
During the preconstruction process, the national economy began to deteriorate, which was cause for concern. In an effort to respond to the market, a decision was made to phase the project and initially build only 90,000 square feet (8,300 m2). It was more cost-effective to mass grade on the site with the construction of the first phase. This approach would allow subsequent phases to be delivered more quickly as the economy recovered. The slowdown in the economy proved to be beneficial, as construction costs dropped almost $3 per square foot ($32/m2) below budget for the core and shell. The site work was approximately $1 million below what it would have been in a more heated economy.
FINANCING
Holladay’s CEO indicated that it was important to find a joint venture partner to help fund equity for this project as Holladay had several large projects underway in its various regional offices. The CEO stressed that availability of equity capital for a project of this magnitude was limited. Initial projections showed Phase I project costs of approximately $12.5 million, with an equity requirement of approximately $2.5 million. A cost breakdown is shown in figure B.
Holladay contacted Q10 Vista, a commercial mortgage broker, in search of an equity partner, which in turn located a life insurance company that had a joint venture program. Under the joint venture program, the developer puts in 10 percent of the equity and the life insurance company puts in 90 percent. Each party receives a pari passu, 8 percent return on its equity. When the preferred return is met, cash flow and/or refinancing proceeds are split 50/50.
The life insurance company also provided a permanent loan takeout. However, the life insurance company’s preference was to place the debt with a third party. The takeout, which was not contingent on leasing, allowed the developer to get construction financing in a difficult market.
The joint venture partner liked the fact that the project was industrial and was in an in-fill location between downtown and the airport in the preferred industrial corridor in Nashville. It was also impressed with Holladay’s track record in developing similar projects in other markets.
LEED DESIGNATION
Very few industrial buildings had been constructed with the LEED Core and Shell designation and none had been done in Nashville before the construction of Ameriplex. To achieve LEED certification, one must have a LEED consultant to certify and commission the building. In this case, Hastings Architecture Associates, LLC, was hired as the LEED consultant. During the predesign sessions, the development team went through the preliminary questionnaire and felt that they could achieve LEED certification for the site and the building. (A LEED for Core and Shell project checklist can be found at www.uli.org/PRED.)
Holladay also decided that its local corporate offices would be LEED certified and would include the following features:
• high-efficiency, motion sensor lighting controls;
• Trane variable air volume systems with a sophisticated energy management system;
• carpet tiles with recycled content;
• wood flooring with recycled content;
• recycled glass tiles in bathrooms; and
• wood products from renewable forests.
The project achieved LEED precertification with the LEED Silver designation. It was being delivered below budget as a LEED project.
CONSTRUCTION
The site work had taken longer than anticipated because of rezoning issues and other problems. The target goal was to have the pad for the first building complete and ready to start construction in May 2009. The pad was approximately 60 days late, primarily due an extremely wet spring in Nashville.
Holladay would be moving its corporate offices from a building down the street into the new construction. The existing location, a rehabilitated printing plant, had been sold to a health insurance company, and the new owner had to be in the building no later than October 15, 2009. This timeline presented serious scheduling problems, and the critical path indicated that the tenant finishes in the new Holladay suite would need to be completed in four weeks to meet it. A typical timetable for constructing 11,000 square feet (1,000 m2) of office space would be eight to nine weeks.
In an effort to further reduce costs, the development team segmented the contracts. They contracted directly for the site utilities, steel building, earthwork, and paving. A general contractor was hired to construct the building shell.
FIGURE B | Project Cost Summary
The interior finishes were bid by the general contractor and two interior finish contractors.
Tilt-up construction requires the slab to be poured so the wall panels can be formed on the slab. At Ameriplex, two 45,000-square-foot (4,200 m2) pours would be made. Because of the summer heat in Nashville, the pours were made at night. An unexpected storm rained on one section of the slab damaging the concrete, which required some creative repairs. That event had an adverse effect on an already-tight timeline.
The steel arrived on site in a timely manner and was priced below the original estimate. During construction, the general contractor discovered that the bar joist manufacturer had incorrectly fabricated the bar joists and field modifications had to be made. The steel supplier made the changes and agreed to fund certain overtime charges that would be required to meet the timeline for the Holladay interior finish work. The schedule lost two weeks during the refabrication of the joists.
The HVAC equipment was delivered for the Holladay space approximately three weeks before the planned occupancy. Unfortunately, Nashville Electric Service could not provide utilities for the site until approximately three days before scheduled occupancy. As a consequence, a generator had to be rented so the HVAC unit could be fired up to dehumidify the space to allow drywall and paint to cure properly. Air filters in the space were changed frequently to avoid damage to the unit and to ensure interior air quality. In the final two weeks, crews had to work weekends and nights to complete the space. Permits were obtained from the city the day before the move. Holladay moved into its offices as work continued on the second half of the building.
LEASING AND MARKETING
The property was listed, locally with Colliers Turley Martin Tucker and with Ronnie Wenzler, who concentrated his efforts in this submarket. He had more than 20 years of industrial brokerage experience in the Nashville community. Holladay had a longstanding relationship with Wenzler and had faith in his abilities and integrity. Wenzler was brought in during the conceptual stages to provide invaluable input on the property design, layout, and amenities. Having branded several projects in other cities with the Ameriplex name, Holladay decided to name the project Ameriplex at Elm Hill.
As new construction, the development would be priced at top of the market. As a consequence, the development team had to demonstrate a value proposition. They believed the green features and the cost savings that would accrue to the tenants would provide a competitive advantage so the marketing strategy did not focus on rent rate, but rather on total occupancy costs. The tenant spaces were separately metered. The energy efficiency of the building and its sophisticated lighting package produced significant operating cost savings to the tenant. Early in preleasing efforts, the marketing team nearly secured a clothing company’s research department. But just as leases were being circulated for signatures, the company elected to undergo a reorganization, killing the transaction. This loss was disheartening, but the team continued to believe in the great location and the quality of the product.
As the building neared completion, Holladay experienced an increased level of leasing activity, indicating that the economy was starting to recover. A major HVAC company wanted to relocate its R&D function from California to Nashville to be closer to its manufacturing plant. This company was impressed by the green features of the building and its central location. After several rounds of negotiation, a lease was signed for 23,000 square feet (2,100 m2) and the firm moved into the building 90 days after completion of the shell. Following this tenant’s commitment, the building’s remaining 55,000 square feet (5,100 m2) was fully leased to two additional tenants, in approximately six months.
FINANCIAL SUMMARY
The financial projections in figure C reflect completion of Phase I, including 90,000 square feet (8,400 m2) and 18 pad-ready acres (7 ha). Valuation is based on NOI of $552,000. This project will have a value of $9,915,000, assuming a capitalization rate of 9 percent. The equity created amounts to almost $1,000,000 for the owners. Fully developed, the value of the 300,000-square-foot (28,000 m2) project is expected to be approximately $20,500,000, at a 9 percent cap rate, at a cost of $16,000,000, creating over $4,000,000 of equity for the owners.
FIGURE C | Ameriplex Financial Projections
NOTES
1. Johannson L. Yap and Rene Circ, Guide to Classifying Industrial Property (Washington, D.C.: ULI–the Urban Land Institute, 2003).
2. Interview with David Hasbrouck, executive director, Cushman & Wakefield, Los Angeles, California, May 2000.
3. National Association of Foreign Trade Zones website, www.naftz.org.
4. Interview with Howard Schwimmer, Daum Commercial Real Estate Services, Los Angeles, California, 2001.
5. Interview with Raymond Bhumgara, Gannett Fleming, Inc., Camp Hill, Pennsylvania, 2001.
6. David Twist, “Determinants of Industrial Space Demand,” white paper, AMB Property Corporation, San Francisco, July 2002.
7. Interview with Allan Kotin, adjunct professor, School of Policy Planning and Development, University of Southern California, and Allan D. Kotin & Associates, Los Angeles, California, September 2002.
8. Note that the term special district is used here to refer to a special zoning district. The term special district more commonly refers to special funding districts that are empowered to sell bonds to support infrastructure investment, primarily for water and sewer.
9. See Douglas Porter and Lindell Marsh, eds., Development Agreements (Washington, D.C.: ULI–the Urban Land Institute, 1989).
10. Zoning ordinances usually require three to four spaces per 1,000 square feet of net rentable office area, although most lenders want to see at least four spaces per 1,000 square feet.
11. Interview with David Hasbrouck, May 2000.
12.Ibid.
13. The permanent lender requires that the construction loan be retired so that the permanent mortgage can assume the first lien position previously held by the construction loan.
14. Even then, they were generally required to have some equity, but the value added through appreciation since the time of purchase in land or buildings contributed to a joint venture was treated as equity.
15. The promote is defined mathematically as the difference between the profit percentage and the capital contribution. If the operating partner puts up 15 percent of the capital and receives 40 percent of the profits, his promote is 25 percent.
16. See Pete Gregovich, Phil Lukowski, Steve McSkimming, Don Morse, and Paul Saint-Pierre, “Going beyond the AIMR Performance Presentation Standards: Recommendations on Distributed Income Returns,” Real Estate Finance, Fall 1996, pp. 34–92.
17. Charles Wu, managing director of real estate investments, Charlesbank Capital Partners (formerly Harvard Private Capital Group), lecture at the Harvard Graduate School of Design, December 2000.
18. Ibid.
19. Interview with John Williams, former partner, Acacia Capital, New York, New York, 1988.
20. Gregovich et al., “Going beyond the AIMR Performance Presentation Standards,” pp. 34–92.
21. Interview with David Hasbrouck, May 2000.
22. Interview with Izzy Eichenstein, CEO, Oakstone Company, Los Angeles, California, June 2000.