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Small Business Center

Flip or Flop: 5 Tips for Evaluating a Second-Gen Space

September 17, 2021

By Sheila Laderberg Tarasuik, Pedal Retail Advisors
www.pedalretail.com

You already know that planning for the cost of construction is a fundamental step in opening your retail space. A common misconception is that a “second-generation” space will always be less expensive than building out raw space. 

Second-generation spaces are those that were previously built out and have already housed operating businesses, whether for many years or only briefly. Can a second-gen space ever be an amazing budget-friendly solution? Of course, when it’s turnkey — meaning it’s exactly or really close to exactly what your business needs. This is more often the case for non-food retailers like boutiques that have minimal utility requirements. For businesses that need specific plumbing, electrical and mechanical connections — ahem, anything involving cooking — finding a turnkey space is a whole lot harder.

Here are five tips to help you think critically about a second-gen space.

1. Look critically

Veteran project manager Sarah Steel, principal of Steel Management Group, put it well in saying that new retailers need to “take off the eagerness blinders and put on the logic hat.” These eagerness blinders go by many names, some positive like “enthusiasm” and “drive” and some dangerous like “naivete” and “ignorance.” However you look at it, eagerness blinders are real. Instead of feeling ashamed or embarrassed, embrace the reality that as a first-timer, you are new to the process and need and deserve trustworthy guidance and education. 

Retailers, when you take off your eagerness blinders, you can approach a space with critical eyes. And when you put on your logic hat, you can assess what your critical eyes see against the needs of your business and budget. In most cases, plenty of retail spaces may work for you, but if you’re wearing eagerness blinders, you’re temporarily shielding your eyes from aspects of the space that eventually will require your attention — and your money.

2. Check your use

“Use” is not just how you plan to use a space. It’s also a requirement your jurisdiction will need in order to permit and license your buildout and business. If you are taking over a former foodservice space and your use is foodservice, you can probably assume that the existing buildout and rules governing what kind of business can operate in that space are going to work for you. But what if you’re a yoga studio with plans to operate a juice bar in the front and you’re taking over a second-gen yoga space? You may run into problems if your jurisdiction says your space is not approved for foodservice. 

You also have to consider how your brand fits with the space. Are you trying to open a play place for kids? Is the space in a basement? Do customers want to take their kids to play in a basement? How much will it cost to make it not feel like a basement? Could that money be better spent building out an empty space with more natural light? These are the questions to ask.

3. Check the original date

Robert Mescolotto, owner of Hospitality Construction Services Inc., likens second-gen spaces to eggs; they have a natural expiration date after which they’re just not good anymore. According to Mescolotto, three to five years is the threshold after which second-gen spaces start to spoil. Ready-built spaces in good condition, up to code and in need of only cosmetic updates are the unicorns, and they are the spaces best understood to be turnkey. Second-gen spaces that fall outside of this ideal can become full gut jobs because it’s cheaper and simpler to tear it all down than to modify. 

Not only does the wear and tear on the space and its systems start to show as the years pass, but there is also increasing likelihood that building codes may have changed and the existing systems may no longer be compliant, requiring time-consuming and expensive upgrades. It’s incredibly frustrating to your timeline and budget to expect to reuse a system like a grease interceptor only to find that your county has changed requirements and is requiring an upgrade. 

Finally, second-gen spaces under five years old are more likely to have architectural and engineering plans that someone close to the deal can actually locate. Think about scouring the beach for a treasure chest with a metal detector. Wouldn’t it be easier if you also had a treasure map? So many of the critical systems — plumbing, electrical and mechanical — are literally hidden from view under the floor, inside walls, above the ceiling. As time passes, properties change hands, property managers change jobs and architectural and engineering plans can get lost in the shuffle.

4. Kick the tires and look under the hood

You can see a lot with an untrained eye, but you should absolutely, positively have an experienced retail construction partner helping you evaluate any space you’re seriously considering. In a long and expensive process, here’s a piece of great news: Finding a good contractor to review your space is usually free.

You need a commercial general contractor with retail and/or hospitality experience. Do not call your Uncle Jeff who is a residential contractor or your brother’s friend who remodeled her own kitchen. Construction costs — materials and labor — are pretty fixed, so you’re not saving money by skimping on construction partners. This is the time to value experience in building for your use and working with permits and inspections in your jurisdiction.

Once a construction partner checks over the space and gives you big-picture feedback, they will likely offer to review any work letters you’ll negotiate with your landlord. Say yes. Work letters, tenant improvement allowances, delivery dates and rent commencement dates are among the negotiable elements in a letter of intent that translate to cash when it comes to buildout time. 

Chris DeLuca, principal of MPC and national tenant advisor at Sabre Advisors, recommends involving your construction partner while you’re still evaluating multiple sites. At a due-diligence minimum, they should determine that the existing utility sizing is sufficient and the mechanical systems are in working order. Also, if you’re a restaurant, contract a hood maintenance vendor to check over the fire suppression, grease duct and venting systems. If there are problems with any of these big-ticket items, you don’t have to abandon the project, but you should add this to your LOI negotiations because such improvements or repairs are material to your buildout budget and overall financial deal.

5. Talk about your budget

The “let’s not talk about money” rule may apply to dinner with your in-laws, but talking openly about money is essential to managing a buildout. You are the one who will pay for this project, both emotionally and financially. Get over any discomfort with telling brokers, designers, architects and contractors how much you can spend, and be open. When everyone has the relevant information, they can more effectively and efficiently find, design and build a space you’ll love. 

Is your budget $4 million? Great. Is your budget $400,000? Great. Experienced architects and building professionals know how to work with a range of budgets. They can deliver what will work for you only if they understand the true parameters of your budget. Everyone has budget constraints on some level, so don’t feel like your budget is an indicator of your worth. Everyone involved in your project wants you and your business to succeed, and success happens across the budget spectrum.

An experienced construction partner can easily assess whether the second-gen space you’re considering will work with your budget or you’d be better off starting with shell space. They’ve seen a lot over the years and are invaluable resources when it comes to making smarter decisions.

This content originally appeared at www.pedalretail.com/blog/second-gen.

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