What do you do if the perfect building for expanding your company has just one flaw – it borders “the ghetto”?
My client posed this problem to my daughter and I over fish tacos, as we overlooked the water near Oakland, California. His machining business is thriving these days with clients from aerospace to apple picking. He has outgrown his land-locked 20,000 square-foot brick building, still owned by his dad, who is in his 80s.
Stanley, our client, is no novice at real estate. He has a side business flipping homes in the Bay Area and owns a valuable piece of land his own home sits on. He has been searching the area near his factory for a new location for his business for quite awhile but cannot find a suitable property at a price he can afford.
Then the perfect building finally appeared. Solid construction, accessible, big enough to satisfy his expansion needs, and priced right. Just has that one problem – the Oakland ghetto encroaches on it.
Stanley doesn’t see it as a race issue. It’s a safety issue. It’s an image issue, an employee recruiting issue and a real estate value issue. Ultimately, it is about money. Do you invest more than a million bucks in the perfect building that some people are afraid to go to?
I posed to him the idea of renting the property. The downside of that is he would have to invest $200,000 to move and rewire his equipment, so he hates to commit to a temporary situation. He’s been in his present building for several decades.
He is worried that women buyers and employees might be scared to come to a building in a suspect location. My daughter admitted that she might have reservations visiting if it was in a high crime location.
Stanley knows that doing nothing would cost him a ton of new business opportunities. Buying the building, despite its big question marks, might enable him to make a lot more money than he would sacrifice in potential property value appreciation.
He feels he can deal with the safety issues and still hire and retain good people with the new building. What would you do in Stanley’s place?
Question: Is it better to rent or buy?
Renting is a better deal in most areas for a lot of businesses. As local government realize they overspent or promised great retirement packages to employees cities will have to raise taxes to cover themselves. As a renter you can lock in a long term lease and not really worry about property taxes skyrocketing.
I think he wants an inexpensive place in a nice neiborhood which does not happen in the bay area unless he can find a teardown & rebuild it (more money & time). Why not have a small nice place as a front door for customers with sample parts, then put the large machine shop in the getto where real estate is cheap?
JOL says rent due to avoiding changing taxes. However, in a triple net lease (which we found is common), the renter is still responsible for those, just like they own the place.
what goes around comes around. I can remember visiting various used machinery dealers 40 years ago when Chicago was not considered a “safe” area.
Couple thoughts in addition to your known challenges, what is his exit strategy? If selling is an option would a future buyer discount for location, would he sell to his kids?
Three most important things in real estate are location, location and location.
Another thought is would I feel comfortable bringing customers to the location? Would they feel uncomfortable giving him a contract after seeing where there work is being performed.
Running a business is stressful enough all by itself, do you really want to add this to the list? Will your employees worry while working?
Lastly, do you believe the economy will stay strong, 45% of Americans are on the sideline, Obumbler Care is about to blow up and we are running out of money to support the Government PonZi scheme… I vote no.
First question would be to figure out why the building is available. Did the previous tenant move out as the ghetto encroached on the property, or did the builder have insider info that this area is being revitalized? Is there an opportunity to pick up neighboring property cheap so he can actually build a buffer to his factory property?
If the ghetto has encroached, look somewhere else. As noted above cities are going to be stretched for years to come and the revitalization dollars are going to be few an far between, not likely that “manufacturing” will be in California on anyones popularity profile.
I agree that triple net leasing will do nothing to reduce your exposure to high taxes. Steps others have taken to deal with the bad neighborhood factor:
1. Buy the building and “fortify” it so the employees drive in through a guarded gate into a fenced, well lit parking area
2. As Brian Phillips says, put your front office in a nice area and do your manufacturing in the new location.
Several years ago we moved a manufacturer from a Philly ghetto out to the burbs. Reason for moving was the area had become unsafe to work with muggers climbing in through the skylights and robbing employees on night shifts as well as breaking in and stealing the copper wiring during the weekends. Savings in costs of full time security personnel likely went a long way toward paying for the move. I have also done work in machine shops down in the old Chicago stock yards area that seemed very safe due to excellent security fencing and the presence armed guards. Personally, I would go for a safe area and have one less problem to deal with unless the local economic development incentives and skilled labor pool were too good to ignore.
I have thought a lot about this issue having grown up on the Southside of Chicago, had a factory building next to a “chop shop” in what became part of the ghetto. I now live in an area that is becoming primarily home to African Americans though hardly what I would call “ghetto”. My home value is about the same as when I bought our beautiful 5 bedroom 2 story, 35 years ago. On the other hand Areas South and west of the Loop have appreciated enormously in recent years. They had been “ghetto” ten years ago.
I guess I would probably “chicken out” on the property because of personal safety fears and lack of upside on the value, but for a machining company in the extremely pricy California market I think it is a close call.
Many, many years ago I worked at the old Oscar Mayer plant in Chicago. It was situated next to Cooley High, the Cabrini Green Projects and Wells street where the biggest industry on the street at the time was sex. We frankly felt very safe due to the fact that our security force was comprised of mainly off duty Chicago policemen and we had a very good video camera set-up. If that kind of security is out of the question, he may want to consider rental with the option to buy. If the area does get better (or doesn’t get any worse) he can take the plunge. If the area gets worse, he can look again. The one thing he doesn’t want to do is nothing. (e.g. Lead, Follow or get out of the way!)
We purchased land and built our building to suit our needs. I admit it takes time which is money but well worth it. The issues we here in the northeast encounter is cold weather and of lately hot weather. The building was built with double block walls and Pella windows.
Things are changing so quickly. Gentrification is happening all over. I don’t know about California, but here in Chicago neighborhoods that were gang control a decade ago are hipsterized and a 2 bedroom condo bordering a crime filled area can be $300,000. If your client did some research to see the direction his potential location is heading towards, he might end up with a fantastic deal and a location that’s not so bad in 10 years.
Show me a bad neighborhood that’s been changed for the better and I’ll show you a welfare office that’s been relocated. Cities have discovered how to take their downtowns back by moving the problem. It’s not a bad thing though, they relocate and decentralize the welfare office to locations with job availability.