I have recently been looking for new site locations from my co-warehousing business, Blue Co. What an eye opening experience that has been over the last couple months, rife with ups and downs and business lessons for all. The short story is: as a startup, you only have a few opportunities to open a new location, and you have to get it right to impress your investors. No opportunity is perfect, and you may need to make some sacrifices. But knowing what elements are non-negotiable, could be the difference between keeping your business growing and potentially “sinking the ship”. Allow me to explain.
What Blue Co Was Searching For?
Blue Co was on the hunt for 50,000 to 70,000 square foot buildings in major metropolitan markets of the Southeast at terms its unique co-warehousing model could afford. The locations needed to be within the “beltways” of those major markets (e.g., under 10 miles from the city center), with nearby highway access and plenty of parking for its members. After reviewing over 200 listings, and not a single signed lease to show for it, it became clear that this search was going to be a lot harder than expected.
What Were The Challenges?
There were so many decision points in picking a new location. The city, the location, the property, the surrounding neighborhood and demographics, the building type (e.g., industrial, retail, office), the floor plan, the building features (e.g., number of docks, number of parking spots), the lease terms and the capital required, to name a few. On this last point about capital, there were a lot of variations there too, in terms of financing the real estate, the tenant improvements, the lease securitization, the startup costs, etc. And to make matters worse, there wasn’t a one-size fits all investor—some preferred real estate investing, some preferred venture investing the operating company, and some preferred lending debt secured by needed equipment. Even if you found the right building, there was no guarantee it would come at terms you would be happy with or with financing partners that shared the enthusiasm for that location.
Some Screening Decisions Were Easy—Decisions Made By Us
For our business, having enough parking was pretty important. If the property wasn’t at least 5 acres in size to enable parking for over 150 cars, that was largely a non-starter and could quickly cut those properties off the list. If we really liked the location, maybe we could find a nearby satellite parking lot, but that meant we couldn’t do one without the other, adding a level of complexity to our search and discussions. Other simple decisions could quickly be made to ensure the property had an entrepreneur-friendly landlord, affordable rent, large enough square footage, nearby highway access, etc. The point here, the better you can screen these properties to the most important need, the less wasted time you would have.
Some Screening Decisions Were Easy—Decisions Made By Them
Sometimes, a building would check all the right boxes for us, but we didn’t check all the right boxes for our landlord. Maybe they didn’t like our co-warehousing model in their building. Or their lending banks didn’t like having a startup as a tenant. Or our financials were not as “pretty” as other larger companies. Whatever the case may be, it is never fun to find a great building, to only get shot down by the other party. So, ask those questions early in the process, to ensure you did not unnecessarily spin your wheels for no good reason.
Issues With The Landlord
Not all landlords are created equal. Big institutionally owned buildings backed by big billion dollar banks were typically the hardest to work with. Their asks of a tenant were pretty much the same regardless of their business size, making it much harder for a startup to secure a building with them. But, on the other hand, even if you found an entrepreneur-friendly landlord, that doesn’t mean they will give you the best terms. As an example, we had one such landlord trying to charge us 33% higher rent, because they knew we didn’t have a lot of negotiating power as a startup. Just make sure whoever you decide to work with will do so in a win-win way, and will have your back in good times or in bad times.
Issues With the Investors
We have had a couple situations where we found an investor for the building, but something didn’t work well for them. They liked to invest in Raleigh (not Greensboro, too far away). They like to invest in industrial buildings (not the converted big-box retail site were looking at). They won’t look at any building that had any rezoning risks. We had one investor say we’ll fund the building you like, but we are going to need to you take this other less desirable building, as well, which didn’t work for us. Or we needed to hit some operating metrics on our old buildings, before they would consider the new buildings. Fund raising is never easy, but make sure you do your due diligence on them, the same time they are doing their due diligence on you.
Issues With the Building
There are a lot of moving pieces with the building itself. Was the space all on one floor or not? Were the ceilings high enough to support warehouse racking? Was at least 10% of the building finished office space? Was the building climate controlled? How old were the HVAC and electrical systems? How many docks did it have and were they high docks for semi-trailers, low docks for box trucks or drive-in docks for smaller vehicles? Was the building nice looking and fit with our brand image? You get the point each building had its own unique challenges. Know which ones are deal killers or not.
Issues With the Lease Terms
There are a lot of moving pieces in a commercial lease. The lease length, the rent price, the operating costs, the amount of free rent period, the amount of the tenant improvements, the securitization asks of the landlord (e.g., personal guarantees, letters of credit, security deposits). They all needed to fit together, like a jigsaw puzzle to get both parties to the finish line. Often times these were negotiated at the end, after you fell in love with a building. I suggest negotiating these first, to not waste a lot of time, unnecessarily.
One Case Study Worth Calling Out—The Perfect Building at Less Than Perfect Terms
We had found the absolute perfect building at the absolute perfect location with the absolute perfect landlord. But when their banks got involved, the terms of the deal became unfavorable to us. They were asking for a very high letter of credit, that made it near impossible to move forward until we finished our fund raising efforts. But they did their best to get creative, pulling way back on our tenant improvement requirements, which in turn lowered their letter of credit ask. But in doing so, it meant we would not have enough office space to keep our clients and income statement happy.
We did everything we could to try and make this work. But we didn’t want to risk an underperforming location at the same time we raising capital. And we didn’t want to invest everything we had into this building, without leaving the business with enough cash cushion for a “rainy day”. We decided to walk, as painful as it was, to ensure we didn’t put our business in a bind in the event things did not go perfectly to plan, which they rarely do. We may not have walked a couple months from now, post our fundraising, but moving forward now dangerously felt like putting the “cart before the horse”.
Closing Thoughts
So, why did I share all these excruciating details about our site selection process? To basically say three things: (1) know what the priority levers are in any business decision to save you from spinning your wheels on a lot of unnecessary work; (2) when you do find something that could work, quickly assess it to ensure the terms and partners are to your liking; and (3) never “force it”—if your gut is telling you moving forward would be a stretch for your business, walk away to live another day, no matter how much you like it. I hope this helped you not only with your real estate related projects, but your general business decision making process, as well.
For future posts, please follow me on Twitter at: @georgedeeb.
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