Heinz Stucki
Director of Economic Development
Community Improvement Corporation
of Tuscarawas County
The construction of shell buildings can be an effective tool for communities to spur economic development. Some 26 percent of Ohio communities have constructed publicly-owned shell buildings. Nationally the figure is 27 percent.
The advantages are straightforward. First, many companies evaluating relocation opportunities prefer to move into an existing building. Second, an existing building can provide the focus for a total community marketing campaign. Third, a well conceived building project may be able to offer cost benefits to the acquiring company and income to the sponsoring organization. And finally, as has often been said: "You can't sell from an empty wagon."
The risks to the sponsoring organization can be significant, however. The building parameters must reflect current demand. Carrying costs can adversely impact the organization's finances if the building is empty for an extended period.
The successful construction and sale or lease of a shell building is a management challenge and requires careful attention to marketing, financing, and construction. The present fact sheet provides guidelines and considerations for optimizing advantages while minimizing risks based on hands-on experience. It must be emphasized that the market demand for buildings and the availability of specific public and private programs to facilitate their construction is subject to change. Each project requires careful research and planning.
Is there a demand for buildings in your community or are they a glut on the market? If buildings are in adequate supply, you would do well to avoid shell building construction as an economic development strategy. It is not realistic to expect a gain on every venture, but gains on some projects are clearly necessary to cancel losses on others.
Size requirement seems to vary from year to year. Other factors to evaluate are the ratio of length to width, ceiling height, lot size, office and restroom facilities, provisions for expanding or dividing the building, door and loading dock number and configuration, electrical and gas service capacity, and the need for rail service.
Canvass other state and local economic development organizations regarding their experiences and review recent leads such as those from the Ohio Department of Development's Site Selection System and the First Frontier Fund to ascertain what types of buildings are currently sought by prospects.
The community should agree in principle on the type of business that would fit into their environment and the type of business that will be the target of marketing efforts. Consequently, the size, configuration, and location should be generally defined.
Experience suggests that in general, engineered steel buildings are the most suitable for speculative purposes. Actual construction is fast. A prefabricated building can be delivered in 6 to 8 weeks and requires only about 6 weeks for erection. Grading and foundation work can be completed while awaiting delivery. Expansion of steel buildings is typically much easier than with masonry construction.
Other considerations are whether or not to pour the floor and if so, to what thickness. Floors represent a significant cost, which under ideal circumstances can be delayed until the building is sold or leased. Once poured, floor thickness cannot readily be changed. While 4 inches may suffice for light manufacturing, 6 inches is customary and even greater thickness and reinforcement are required for heavy industrial operations. Because dirt floors retain moisture, concrete must be poured before winter to avoid corrosion of the internal steel building components. If heating is required, the building should be insulated.
Office space and restroom requirements vary with building use. In most cases, it is probably wise to delay completion of these facilities and install rough plumbing only if permitted by code.
Gas and electrical service must be available. The utilities that will serve the building should be contacted early in the planning process to determine requirements and possible costs. Water and sewer connections and good highway access are extremely important. Rail can be a major plus.
Risks in sizing the building can be reduced by designing it to be either readily expandable or dividable. The importance of providing adequate land for parking and expansion cannot be overemphasized. A good rule of thumb is to allow a 10 to 1 land to building ratio. While it is generally not necessary to pave parking areas, at least a minimum area needs to be prepared with a stone base and stone top dressing to facilitate showing of the building.
Construction costs vary greatly. The two examples provided later in this fact sheet provide guidance, but obtain current estimates from an architect familiar with your area. Do not overlook legal and realty listing fees and real estate taxes while planning the project. Some of these can be significant.
In general, the community where the building is to be built should be willing to abate taxes until it is sold. Real estate agents, attorneys, and architects may be willing to accept a lower fee as a community service. Utilities may be in a position to provide free or reduced-cost service connections.
The increased infrastructure costs associated with an isolated building will generally favor locating the building in a fully-serviced industrial park.
The key funding consideration is to minimize debt-carrying costs. In the two project examples presented later in this fact sheet, the buildings sold quickly, but this is clearly not always the case.
Frequently a consortium of local community-minded financial institutions will agree to assemble a financing package at below-market rates.
The landowner may be willing to delay collection until sale of the building, i.e., land bank the property. This is especially true in the case of a green field site. Ultimately a green field, even if fully serviced, is a cornfield and not an industrial park until the first building is in place. An initial building thus acts as a catalyst and significantly enhances the value of the landowner's remaining property.
Utilities may be able to help. For example, American Electric Power (AEP) has a shell building assistance program for communities in its service area. Under the terms of this program, AEP may make an interest-free loan to the local development corporation to cover the debt service on qualifying not-for-profit projects for up to three years. AEP is subsequently reimbursed upon sale or lease of the building.
If your community qualifies, the State of Ohio's Rural Industrial Park Loan Program provides five-year zero-percent loans for up to $1,000,000 for speculative building construction. The Ohio Department of Development identifies qualifying communities which must meet two of the following three criteria:
It is never too soon to begin the marketing campaign. Broad exposure is facilitated by listing with a national broker. Many national brokers will also work with a local broker. The local broker needs to be chosen carefully and must have experience in working with industrial property. Listing contracts should have a provision to exclude fees if the building is sold through the organization's own efforts.
The most cost-effective advertising is free publicity by local media. On the other hand, most site consultants consistently rank videos and ads in site selection magazines as poor places to spend advertising dollars.
It is no longer possible to ignore the Internet as an economic development marketing tool. Provide information about the building on a web site. To ensure that potential tenants conducting a search by means of search engines will locate your site, be certain to use metatags such as "industrial building" or "shell building" and specifically list the URL of your web page with popular search engines such as Yahoo, Alta Vista, and Savvy Search.
Site consultants, utilities (electric, gas, and telephone), and rail carriers can be valuable allies. Be certain they are aware of your building. Open houses can be effective tools to encourage these organizations to actually visit and see the building.
Finally list the building with ODOD's Site Selection System by providing information to your OEDC or regional ODOD representatives.
Short-term warehousing is one of the best interim uses for a building in case it does not sell quickly. Rental rates will most likely be lower than in the case of longer-term leases. Contracts should have a provision for vacating the building on 60 to 90 day notice if and when a manufacturing client is identified and should include prohibitions against environmentally unsound practices. Generally it is wise to require the tenant to provide an EPA Phase One certificate on vacating.
Typically economic development organizations erect buildings for sale, but leasing can also be an effective strategy. Jobs are created in any case, the company's initial capital costs are reduced with a lease-buy option, and the organization gains an income stream.
Do not overlook the private sector. For-profit shell buildings can be a sound vehicle for job creation. Involving the private sector makes good sense especially if the local economic development organization has limited borrowing capacity. A potentially fruitful basis for a partnership is for the private partner to supply the financing and for the non-profit organization to provide technical and marketing assistance.
Table 1 shows actual costs for two shell buildings erected recently by different economic development organizations in east central Ohio. These costs were unique to these buildings of course and are meant only to provide rough guidance about the types and magnitudes likely to be encountered.
Building A was a 12,000 square foot building erected in a rural village in 1994. It was designed to be readily doubled or quadrupled in size. This was a steel building situated on 3 acres. Features included a 6-inch concrete floor, two man doors, two overhead doors, a minimum 24-foot ceiling, unit heaters, fiberglass insulation, and provisions for future restrooms. The building was empty for approximately one year; however, the landowner, attorney, and architect delayed billing until it was sold, and the actual construction costs were self-financed, eliminating most carrying costs.
Building B was a 50,000 square foot steel building constructed on 10 acres in a rural city in 1995. This building had two surface truck doors, four loading docks, a 22-foot minimum ceiling height, and completed restroom facilities. It was sold before construction was completed, eliminating carrying costs.
| Table 1. Representative Actual Shell Building Costs | ||
|---|---|---|
| Building A | Building B | |
| Land | 40,000 | 150,000 |
| Building Permit | 1,140 | * |
| General Contractor | 173,000 | 750,000 |
| Architect | 8,728 | 25,000 |
| Legal | 5,673 | pro bono |
| Utilities | 1,342 | * |
| Real Estate Taxes | 5,620 | none |
| Realty Fee | 13,000 | none |
| Insurance | 1,564 | none |
| Termite Inspection | 50 | * |
| Conveyance Fee | 1,040 | * |
| Total | 251,157 | 925,000 |
| *Included in general contractor's fee | ||
Erecting industrial shell buildings can be an effective economic development strategy, but informed and focused project management is required to ensure success. For example, the Tuscarawas County CIC's shell buildings program has helped to directly create more than 725 industrial jobs over the years. More were created indirectly because of the multiplier effect of industrial jobs. Both losses and gains were realized on the seven buildings erected to date, but overall the program has been entirely self supporting.
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