Build-to-Suit vs Build-Out When Browsing Retail Space for Rent in NJ
Your Garden State business is growing at a fast pace, and now you need a new retail space for rent in NJ. The way we see it, there are four options that are available to you:
1 Build and own your facility
2 Acquire an existing building an renovate
3 Lease or Sublease a retail space
4 Build-to-suit Lease
How do you know which option is right for your growth strategy? The commercial real estate experts at Blau & Berg are here today to discuss the differences, pros and cons of each option to help shed more light on your next business decision.
In the first two options, the primary two disadvantages are that you are going to incur high upfront capital and that these kind of retail spaces for rent in NJ are not customizable. The third option of leasing and subleasing is a cost-effective solution, but again, space will not be customizable. You will have to work within the space constraints and facilities that are already available, and there is no flexibility. With the fourth option of Build-to-Suit Lease, the mentioned disadvantages can be overcome. It is cost-effective as it does not involve any high upfront costs and you can customize the space according to your business’s needs.
Now, let’s hone in on the options associated with building to suit or building out a retail space.
In a Build-to-Suit Lease, a landlord or developer purchases the land and then builds according to the business’s specifications. It is to be noted that the contracts need to be signed beforehand. After that, the landlord pays for construction and retains the ownership. The business can then lease the retail space by paying monthly or annual rent as agreed upon in the contract agreement. Therefore, in this type of lease, a business can get the best of both worlds. As the retail space is built according to the business’s specifications, the constraint for a customized retail space for rent in NJ is overcome. Also, since the landlord is paying for the construction, the business does not need to pay any upfront costs.
- Some business owners get emotional satisfaction by owning their business retail space. Some believe that owning your land is far superior to leasing a land. This thought is based on the assumption that a property will appreciate in value. It is important to note that even though there is a possibility of appreciation, it is not guaranteed, and the value of the property that is bought can be determined by various factors that are not related to the profits or losses of the business. Over time, the location of the property can become a disadvantage as growth and construction will move away from that area.
- Preserved Capital: A build-to-suit lease option allows a business to save costs invested in business retail space and using that capital to invest in business operations.
- Deductions in Tax: This is one of the significant advantages of a build-to-suit lease. The rent payments made in such a contract are 100% tax deductible, but if you buy your own space, only a part of the mortgage payments are tax deductible. Therefore, before you take the tax as a factor in owning or leasing, it is always best to consult with a tax advisor.
- Flexibility: Owning a retail space is inherently a long- term investment and a considerable commitment. While, if you lease the retail space property, the commitment is valid only for the term of the lease. With shorter commitment, the business can have the opportunity to evolve more freely with changing times and priorities. The priorities of a business might change due to:
- Business growth;
- New business model;
- New technology;
- New demographics of the target market;
- New business ownership
5. Ease of disposition: Since the value of the retail property can be determined by various factors that are not related to the profits or losses of the business, the best time to sell off your retail property is rarely the best time to sell your business and vice versa. Build-to-suit leasing allows the business owners to consider these tough decisions without bothering about the doubts over the retail space.
6. Working your strengths: With Leasing, you can concentrate on the work that your business does best. The value of the property is governed by external factors, outside of the business. When you buy your property, you will need the help of skilled people who can manage the risks that come with this property and are a new element of risk.
Build-Out Lease is an option where space is already built or may have been previously occupied by other business. It is up to the landlord to allow remodeling of the space if the business wants something according to their specifications. The requirements might range from some general improvements to space or a complete remodel. A lot of the times, the business has to hire their contractor to renovate the space after an agreement with the landlord has been reached.
The cost of this process is dependent on location, size, type of building, required parking ratio, the level of improvement and finish, and the construction market at the time priced.
What affects the build-out process?
- Condition of Space: When it comes to building out space, one of the first things to notice is that space could be in the second generation or it could be in shell condition. A second-generation retail space is a retail space that has had a prior business as a tenant and so has some improvements that are reusable by the new business using the space. When it is in the second generation, the office is built out. The business sees a reduction in costs if you can find a space that can be used by tweaking a little according to their needs. Shell space is a space which has never been customized for business and consists of wide-open space with support columns, concrete flooring and concrete bottom of the floor above. It is a blank canvas, and the business needs to hire someone to install every finish. So, a shell space will always be at a higher end of the budget.
- Size of Space: The more you build out, the more you are going to spend. So, when building out a larger space versus a smaller space, typically the economy scale works in favor of smaller space. The square foot dollar amount is usually a bit lower for a smaller space.
- Quality of Finishes: Examples of this may be the level of light fixture that is selected, the type of carpet chosen, etc. Almost everything that is put into the retail space is going to have those price points and depending on how the business wants the office to look and the feel they want, there might be a need to install high-end finishes.
- Office Layout: How dense of a space the business requires? How many hard wall offices need to be constructed? Do the employees need to always be in the office, or they can be in an open area? Is there a requirement for multiple conference rooms or only breakout areas within the space? Consider flexible office space – check out our article on this office design trend here.
- Project Schedule: The schedule is one of the essential things to consider. It is going to save the business money if they have the appropriate amount of time to design the project, bid the project, get permits in hand and end up building it. Instead, if they are rushed and need to fast track the project, it is going to cost a lot of money because typically if the design team and project manager are given enough time to take the project from inception to completion, it costs less money.
Advantages of Renting New building over Previously Occupied Building
- As the retail space for rent in NJ is designed according to the business’s specifications, the lease only consists of the facilities that the business needs.
- With the colors of the building according to your needs, it can help create a strong identity for the business.
- The new building is equipped with all the modern equipment which is in top condition instead of equipment that might be years old and not working correctly. Having non-working equipment can cause a significant blow to the daily workings of the business.
- New building projects are generally located in areas of construction growth which means better roads and convenience for employees at the business.
- A new retail space looks more attractive than a previously occupied retail space, especially for the clients. There is no potential for interrupting your brand continuity – anyone who has ever seen a new business inside the building formerly a Pizza Hut or Taco Bell will understand!
- The new building will have the latest ventilation design practices, which ensures that the employees get a healthy environment to work in.
- The bathroom fixtures and other electronic equipment are all more reliable because they are of high quality and with the latest technology.
So, if you’re doing business locally and you’re ready for a new retail space for rent in NJ, hopefully this information can get you starting in the right direction.
And be sure to contact the New Jersey commercial real estate experts at Blau & Berg to help you find the perfect retail space for rent in NJ!