Tax reform and growth: What to consider before purchasing or expanding industrial space
Following the financial meltdown of 2008, commercial real estate earned a reputation as a “necessary evil”— an anchor to many business’ portfolio of investments. Passage of the Tax Cuts and Jobs Act of 2017 has prompted a shift in perspective. As businesses respond to a more optimistic climate, real estate is again becoming an attractive asset.
This is especially true in the industrial sector, where businesses stand to benefit from both a friendlier corporate tax rate and more generous depreciation rules for real estate. With more discretionary cash on hand, owners have greater latitude to invest in people, equipment, and capabilities. But what they may not have is the room to grow their operations.
As plans for growth bump up against available space, owners will need to decide: expand their existing facility or find a new location? Tax reform is expected to make financing much easier to obtain, which opens more possibilities for businesses. But before they put on hard hats or start exploring property listings, owners should take the following into consideration:
- Site Amenities. When looking for a new space or site, the purchase price is naturally a top consideration. But it is only one of many components that owners need to think through. Is the property zoned appropriately? Will it accommodate long-term growth? Does it provide convenient access to transportation corridors? Does the property have utilities, or will the owner need to pay to extend lines to the site? Are there tax abatement opportunities? Will local income taxes affect employee take-home pay? It’s not just about factoring in immediate costs; owners need to analyze how the site will help or hinder long-term growth.
- Costs and Schedule. For owners who have not embarked on a major construction project in the past decade, the cost to expand or build new can be a surprise. In addition, owners often don’t realize how much time is required to work through design and permitting before actual construction can even begin. And timing can play a role as well; winter construction projects are more challenging and, therefore, more expensive.
- Feasibility. Adding square footage is not as simple as drawing up a set of blueprints. Owners first need to determine if the facility can be legally expanded. Zoning restrictions and property setbacks can both affect expansion plans. Available power could also impact expansion feasibility. And owners need to determine if their operations can handle the disruption of a major construction project. Some buildings are designed for growth, which makes the process more efficient and cost-effective. Other structures may pose such a challenge that owners are better off to purchase or lease new space.
As with any strategic business decision, making the best use of new-found after-tax income to expand comes down to planning. In this case, owners are best served by partnering with experts early in the process. For example, a broker can help owners define their needs and wants in terms of industrial space before they invest time in searching for the right property. Brokers also have the expertise to determine what it will take to make the owner’s vision a reality—and to identify potential pitfalls to growth down the road.
Retaining a qualified contractor from the start will also benefit the owner if an expansion or renovation is in the mix. This is especially true for owners who are looking to purchase a building with the intention of renovating or expanding it. A contractor can uncover costly complexities before planning gets too far along—and before the owner signs a purchase agreement. And obtaining estimates early on will mitigate budget and schedule surprises down the road.
Manufacturers and other businesses in the industrial sector have much to be optimistic about. By applying a strategic lens to their facility options, owners will be better positioned to transform that optimism into real growth.
For more information on determining your best options for industrial space in the Dayton market, contact Steve Peters or Gerry Smith at 937.293.0900.