Best way to build an industrial/commercial building?

[Greenfields]

Hello Everyone,

I have recently purchased some land in an industrial area and need to build on it, for a prospective commercial tenant.

My plan is to put up a sign on the section and advertise 'design and build'. Thinking I could attract a potential company, work with them to design a building (roughly 400m2) and by doing so, lock them in on a 10 yr lease. I am not interested in building a structure that is too specific, which could restrict potential new tenants if the first ones fall through after a few years.

What traps can you see that I need to be wary of?

Interested in your thoughts and suggestions.


Many thanks Greenfields

[Rosco]

Hi Greenfields,

We have a client who imports cars and sells them. Really just needs a big shed to store them in. Currently rents and looking at buying section and building.

I got a very basic quote http://durobuilt.co.nz/ . I can't remember the exact figure but I was amazed at how cheap a big shed was.

As the shed was so cheap, the costs of interest and other costs were significantly less than their rent. Or another way of looking at it, the return was over 10% if rent kept the same (which is great for commercial) and the valuation would be significantly more than the cost.

Obviously this would only work if you are looking at warehouses, or workshops etc, but might be an option for you. You can then add offices etc inside, but these would bring up the cost.
Ross

[Davo36]

Well that's an interesting thing to do. Bigger developers tend to do this. You must be in a fairly big way I take it.

You can do quite well out of these sorts of deals. It all comes down to finding the right tenant, getting them signed up on the right terms and so on.

Are you doing this in Auckland? Have you built before?

Traps?

1) Costs. They tend to run away, allow a big margin.
2) Council. Potential for a resource consent full of stupid/costly conditions etc. Be aware of all the various fees you will have to pay.
3) Tenant. Get a 2 month or more deposit out of them, be pretty sure they're not going to take off, go under etc.
4) Funding. Interest rates may go up a fair bit during the development.

In terms of finding a tenant I'd suggest an ad on TradeMe along with using agents.

[Greenfields]

Thanks Rosco and Davo, I have always respected your views on other threads.

Yes, looking at a warehouse and office mix (office would be around the 40-60m2 mark). Like you Rosco I was surprised our cheap a shed being dressed up as a warehouse can be! Thanks for the link too.

Davo, I am doing this in mid Canterbury and no I have not built before. I wouldn't say I am a high flyer in commercial but we do have a commercial property that is nearly freehold. Keen to keep the momentum going! Thanks for your traps, the 2 month deposit is a good idea as well as using Trade Me.

Thinking of having a meeting with an agent to gauge the appetite of warehouses of this size and expected rent. Would they freely give this information or would they laugh at me at the front door?

Cheers.

[Maccachic]

The commercial agent I know here (Tauranga) would happily help you - its in there best interest to develop relationships with potential clients and may even know of people looking.

[Rosco]

Just looked at price for a warehouse build that I mentioned above through Durobuilt (www.durobuilt.co.nz).

Warehouse 360 sqm and were looking at around $110,000 + GST.

I was shocked at how low this cost could be! I still can't believe how cheap these can be, and therefore if you purchased a cheap section and had a reasonable lease, the return could be quite good.

Ross

[Greenfields]

You were right Maccachic, I saw an agent today and was very forth-coming with info.

Rosco, I am awaiting on a draft plan and quote from a local warehouse builder, as I am suspecting the prices will be rather inflated down here in Canterbury!

Before I organise the sign, I better organise the lease agreement with my lawyer. Will be using the ADLS form but are there any variations to the Deed of Lease that you or anyone else would recommend, for a small industrial property like this? (like CPI rent review?). Is a 10 year lease a bit cheeky in this day-in-age, if I design and organise a building for someone?

I appreciate your time, thanks GF

[Wayne]

Is a 10 year lease a bit cheeky in this day-in-age, if I design and organise a building for someone?

That will depend alot on the market.
It will also depend on the extend of specialisation.
If it is pretty bog standard then why would someone go for a 10yr lease when they can probably get something similar elsewhere on better terms?
It is all negotiable as you know being the owner of a commercial already.

[Davo36]

Greenfields, the lease will need some special conditions in it which will be tenant specific.

Along the lines of what you will undertake to build, the size, layout, office and amenities details etc. When the lease will start and so on.

Then the normal things like term of lease etc. commencement date get filled in.

One thing I thought of is this, you can build a tin shed in the middle of the section but not on the boundaries, if you want to do that, you need tilt slab or something. This is for fire reasons. So you can build a smaller cheaper shed, or a bigger dearer one on any given property usually.

Real estate agents often love these deals. Especially if you are going to sell at the end. Why? Because they sell you the section, get a nice big fat 10 year lease fee, and then a really big sale fee when they sell it on, so 3 commissions! I did a few of these when I was an agent, they are fantastic!

[DaveW]

I would do rent reviews based on CPI or market, whichever is the higher; full ratchet clause; tight permitted use; tenant to fit interior; personal guarantee...

Check the council costs and timeframes.

Be open to the idea of multi units. I have done this before where I would buy a multi unit property and build an extra 2 on the end. That way I was using existing consent and services.

[Greenfields]

Thanks guys, all great ideas. Looks like I have some work to do!

Cheers GF