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After 11 years traveling the globe in the U.S. Marine Corps as a judge advocate, Robert Prior returned to his hometown of Madison, Ga., and set up his law practice. In 1998, after just one year in operation, the firm had already outgrown its rented offices, and Madison wasn’t exactly overflowing with leasing opportunities. But what Madison did have though, was history. The community, about 60 miles east of Atlanta, was founded in 1809 and is known as “The town that Sherman refused to burn.” Stately Civil War era mansions and towering magnolia trees line the streets. As a result, it’s been designated the largest historic district in Georgia. “There’s not a lot of office space in Madison, at least not much affordable space,” Prior explains. So when a renovated 1840′s boarding house on the town’s well-traveled Main Street came up for sale, he grabbed it. “I knew the structure would serve me best and be a good investment,” Prior says. The business and real estate law firm has flourished since moving in, and it now includes associate Lee Moss. Prior also plans to hire a second associate. Whatever the location, many attorneys do a balancing act as they look for appropriate space that coincides with the potential long-term plans of the firm. Law firms expand and contract, which can quickly render office space unsuitable. And whether you’re looking at larger or smaller digs, the inevitable question will arise — is it better to buy, build or lease office space? Of course, for most businesses, the decision is rather complex. The need for, or lack of, desirable rental space are two key reasons why firms consider becoming property owners. But an office reflects a firm’s image, so many attorneys factor this into their business plan. For them, ownership projects stability and success to their peers, clients and vendors. When Gary Martin Hays began his personal injury practice, his office fit neatly into approximately 700 square feet in an Atlanta office park. Eleven years and four moves later, he’s now in a building that’s nearly 10 times as large, yet his firm is still bursting at the seams. Its next move should solve that problem. The five lawyers of Gary Martin Hays & Associates will be moving into a custom designed 20,000 square-foot office building. “Our growth has been slowed because of the physical limitations. We backed off of marketing and advertising because there wasn’t a spare spot to put another person.” The new building will be on five acres in Gwinnett County, a rapidly growing suburb of Atlanta. When it comes to the question of ownership, there is no universal answer. Add myriad tax considerations and the decision only becomes more complicated. Many firms, including both Robert Prior and Gary Martin Hays, set up limited liability corporations to hold the real estate title. In turn, their firms lease the property back from the LLC. POINTS TO CONSIDER: LEASING For some firms, leasing has as many benefits as ownership. “There are firms that see business fluctuate dramatically and they may not have the steady cash flow needed to take on a 20-year loan,” says J. Duncan Webb IV, with Webb & Webb, a business and real estate firm in Plano, Texas. “Also, firms that are in a heavy growth stage will find it impossible to plan for sufficient space.” Flexibility needs to be an important element in their business plan. Not being locked into a mortgage will allow such firms to relocate as often as necessary. There’s also an added bonus to leasing in a soft commercial market where landlords need tenants. Class A office space with luxury amenities can be found in large urban areas at prices formerly paid for lesser quality space. Landlords frequently offer generous rent concessions. It’s not uncommon to snag anywhere from three to six months of free rent with a lease commitment. DOLLARS AND SENSE It’s no secret that owning is significantly more expensive than leasing. Although mortgage payments are fixed, taxes, utilities, and maintenance are all variable. Before buying property, do an honest financial assessment. Is there sufficient cash on hand for emergencies? A mortgage loan will typically require a down payment of 10 to 25 percent. An objective assessment can determine the best use of that capital and decide if the firm is better served by investing it back into the business. Property owners have many well-known tax advantages. Mortgage interest, property taxes and other related items are all deductible. Depreciation is also a factor. Most commercial properties now depreciate over 39 years, but smart thinking can accelerate the time period. “You can allocate different components of the building that depreciate more quickly,” says David Deeter, managing partner at Deeter & Frazier, an Atlanta-based accounting firm. “A cost segregation study done by an engineer will allow depreciation of things like sidewalks, or equipment in the building, such as plumbing or the roof. It basically front ends the depreciation.” The cost segregation study entails a total review of all costs associated with the construction or purchase of a building. It allows the owner to classify these costs as either real or personal property. The personal property can be depreciated on an accelerated basis. Shorter depreciation periods offer greater deductions and cash flow. Property that has appreciated in value also gives financial leverage in other business dealings. Increasing a firm’s net worth offers better loan opportunities and more financial stability. BUYING VS. BUILDING If you’re going to stake your own real estate claim, there are essentially two options to consider: buying a building or constructing a new one. Buying a building gives you immediate access to new office space after the closing. If it’s in move-in condition, there is less delay and expense. Remodeling is usually completed faster than new construction. For Prior, the house he purchased was already set up as an office so renovations weren’t necessary, but maintenance is an important part of owning such a historic structure. The pinewood floors have been refinished, interior and exterior painted and light fixtures replaced. It’s all handled with an eye toward the future. “I see this house as a retirement asset,” says Prior. But many firms have clear ideas about where their office should be and what it should look like. Constructing a new building offers more control over the outcome, but is usually more expensive. Architect fees, permits, surveys, and modification costs are just a few of the additional expenditures that can add up to an unpleasant surprise. There’s also something about building an office that ignites a desire for wide open spaces — often resulting in an office that’s much larger than necessary. After all, it seems rather resourceful — lease the extra space, and the tenant’s rent pays the mortgage. While that sounds good, the plan could have serious drawbacks. “You really have to understand the marketability of your space to be successful,” says Kerry Armstrong, vice-president at the Atlanta office of Duke Realty Corporation, a national commercial real estate company. “Leasing puts you in the landlord role. And that can get complicated, particularly if you’re planning to use the space for future growth.” SELECTING A CONTRACTOR Once you’ve decided to build, choosing a contractor is the most important decision to make. A skilled, reputable developer can make the difference between a smooth experience and a nightmare. Jerry Huffman has built office condominiums for 26 years. He’s seen the problems less experienced builders can cause with commercial structures. “Hire a builder with a track record, one where you can see some of the buildings they’ve constructed,” he says. “Talk to several people occupying their properties.” Local builders associations have member lists, or the National Association of Home Builders, also representing commercial builders, can provide names of contractors in your area. While reputation is an important consideration, it doesn’t always guarantee a good fit. For Taylor, Hodkin, Kopelowitz & Ostrow in Ft. Lauderdale, hiring a notable contractor didn’t work out. The firm is constructing a 35,000 square-foot building in the heart of the city’s revitalized downtown district. “We took recommendations, and picked who we thought was the best politically connected,” says managing partner Jeff Ostrow. “Because of the location, it’s a very political piece of property.” The firm hired the contractor but their incompatibility soon became obvious. “We just had different ideas on things, so it didn’t turn out to be the right choice for us.” The firm is back in the interviewing process, but Ostrow says the compatibility factor will now be much higher on his list of requirements. Be diligent in examining the prospects. Look at the various stages of the construction process in other buildings built by prospective developers. If you’re purchasing an existing building, have an independent inspector examine it. As Huffman says, “There’s a big difference between something that’s just built and something that’s built really well.” CUSTOMIZING THE PLAN A key advantage to building an office is the ability to customize its features — such as employee lounges or specialized work areas. However, sizeable modifications may not work for an existing structure. But keep the future in mind. A time may come when the building is no longer suitable and it may need to be sold. The best time to prepare for that possibility is during construction. “Do your best to create something that won’t be difficult to get out of,” says Armstrong. “Things like mock courtrooms are functional for attorneys, but not very useful to others.” PICKING A LOCATION There are times when the land is more valuable than the bricks and mortar on top of it. So determine what part location plays in your practice. Then evaluate the neighborhood and surrounding buildings for compatibility. A firm wanting good visibility may need to consider high-traffic areas, raising the probable purchase price. Others may be fine in quiet suburbs. For some, good visibility is worth going the extra mile. Two years ago, the partners at Taylor Hodkin paid $1.1 million for a prime corner lot in downtown Ft. Lauderdale. A 70-year old, run-down and unused two-story building currently occupies the corner, but will be torn down to make way for a gleaming six-story, mixed-use complex. After its purchase, the firm erected a large sign at the site announcing the upcoming project. Managing partner Ostrow thinks the location is worth every dime, and more. “I’m constantly running into people who know our name from seeing the sign,” he says. “It will be worth 10 times what we paid on the back end for the marketing bonus we get.” Real estate in downtown Ft. Lauderdale has also appreciated significantly since their purchase, and Ostrow says they’ve been offered amounts two times what they paid for the land. INSIDE OPINIONS Experienced developers and purchasers agree on one thing — any firm contemplating a real estate purchase should get expert opinions from industry insiders. Says Ostrow: “You really need go outside for experience, regardless of how competent you think you are.” Karen Dean is a freelance writer based in Monroe, Ga. Contact her at [email protected] Related Article: Essential Steps to Consider When Choosing Office Space

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