Masonry Magazine September 1971 Page. 26
Protect Your Equity
If you approach building with the attitude of a seller, you will protect your equity. While you are getting all of the tax shelter benefits generated by depreciation, a concrete masonry building will in actual fact grow (appreciate) in value. In other words, it is going to be worth more money at the end of ten years than it is worth the day you build it. Much of your equity could go out the window if you build with flimsy materials which deteriorate in actual value. By overlooking quality today, you are adding to your risk with a built-in factor of obsolescence.
Hedge Against Vacancies With C/M
Whether you are going to occupy the building yourself or lease it to someone else, you will have to face the problem of vacancies. If you are leasing the building, you could suffer great financial loss if the structure were so hot in summer or cold in winter that people could not work there. Or, if the building is so noisy and so difficult to keep clean that your tenants move out. The occupancy problem could be even worse with the owner who is using the building himself. Suppose you have highly trained and knowledgeable warehousing personnel and you move them into a brand new building that is uncomfortable and noisy. (The loss of a good warehouseman who knows your inventory is greater than the loss of a rent paying tenant.)
Again, the fact your own employees would be unable to work in your building drastically reduces the value of the structure. Who would want to buy a building with a built-in personnel problem. What about products that cannot stand extremes in temperature? What is the energy cost of maintaining an even and steady control of heating or cooling?
Walk into a concrete masonry warehouse on a hot day and then visit a metal warehouse. Or try it on a cold day. The benefits of concrete masonry construction will become immediately apparent. While you are on the inspection trip, ask yourself which building you would prefer under severe weather conditions the one with walls eight to twelve inches thick, or the building with walls no thicker than a matchbook cover. Remember, the chances are extremely good that you will have to sell the building you buy today. Match the weight of a concrete masonry building to that of one built of metal and you will realize how much more storm and theft protection you will be getting from concrete masonry walls.
Watch Those Insurance Costs
Insurance companies spell out the risk factor as far as a building is concerned. Their rates are based upon actual experience the actual risk that is involved. Concrete masonry buildings are considered superior to the non-combustible structures and the rates are lower for fire and extended coverage. Many insurance companies will insure ONLY masonry buildings against vandalism in certain areas. Keep in mind you may be storing hundreds of thousands of dollars worth of merchandise in this building. The rate on stored contents is always more critical then the rate on the building itself.
However, the type of materials used in building your structure will determine the rate of the contents. The safer the building, the lower the content rate. Check with your insurance representative before you build, because the person you sell to will certainly ask about the cost of insurance as well as other operating expenses. Insurance costs continue for the life of the building. Do not build these costs into your structure. Exercise the same caution in regard to maintenance costs. Build maintenance cost out of-not into your structure.
The Economic Value Of A Building Investment
To the owner who is occupying the building himself, the economic value is predicated primarily upon the tax shelter which the structure will produce and the equity at the time of resale.
For the investor who is building the building to lease, economic value is arrived at in a different manner. In fact, the person investing in a new building will deal with economic value even before the plans are drawn. The financier will be primarily interested in the net income which he will capitalize to arrive at an economic value for the property or how much money he will lend to build the building. In other words, the amount of income the structure will produce will determine economic value.
For the sake of simplicity, let's say that we have a building which will produce $100,000 per year in rent if it is totally occupied. However, we expect a ten percent vacancy rate so this will reduce our revenue to an effective gross income of $90,000. From our effective gross income, we would deduct $20,000 in expenses to arrive at a net income of $70,000.