June 21, 2011

Credit Union Management magazine’s Web-only “Facility Solutions” column runs the third Tuesday of each month.

During a recent presentation about branching strategies and tactics, I was asked this question: “Do you think we should purchase one of the surplus bank branches available in our market, rather than build our own or lease space in a retail center? It seems like the relative cost is much lower.” This same question is often asked about headquarters facilities as well.

The answer depends on the opportunity. We have worked with many credit unions that have experienced significant success recycling existing buildings for their use and observed others that have failed. There are many real estate opportunities in the market today. Some are the right solution while others are disasters waiting to happen.

We have helped credit unions develop facilities strategies and find the most promising existing facilities in hundreds of locations across North America. The reasons to purchase facilities for branching or headquarters differ greatly, and are driven by desired location, size, accessibility, current conditions and cost. Many chapters have been written about the strategic planning process, real estate strategies and site analysis. In this short space, let’s look at some of the ways to help ensure acquisition, occupancy and business success.

Purchasing Existing Branches

A number of banks have been offering their surplus branches for sale. Are these good deals? In terms of cost per square foot, they are often significantly less expensive than building a new facility and certainly faster to market.

But why would a bank sell a branch if it is in a highly productive location? Some banks are required to sell branches due to their financial situation, or banks that have acquired another institution may need to sell market redundant locations. Other banks sell branches because they are no longer productive, due to changes in market characteristics, declining retail characteristics, changes in traffic patterns or accessibility, or shifts in business objectives.

Ask these questions when considering the purchase of another’s branch locations:

• Do we have a strategic branching plan and tactical strategy in place?
• To what degree will the available branch enhance market performance in the short and long term, based on the strategic plan, product and service delivery goals, and growth objectives?
• Which business components will be supported by the facility, and is it of adequate size to accommodate the needs?
• Is the facility larger than needed and, if so, what can be done with the vacant space?
• How will this market evolve over time?
• Are there planned changes to roadways or nearby developments that will impact the site?
• Will the building support future branch evolution or is it better suited for high transaction volume?
• What is the condition of the building, and what will it cost to make it a sound structure that is up to code?
• Is the selling institution charging a premium if sold to another financial institution?
• What will it cost to renovate the building to deliver the desired member experience and brand image compared to purchasing land and building a new facility?

An existing branch in a target market can seem like a slam dunk. The building is there and ready to move into with relatively little work. The basic question to ask is: “Where is the most productive branch location in the market, and how well does this existing branch facility match those location characteristics? If it is close or right on, you have a winner. If the branch is a block or two in the wrong direction, you may invest a good deal in the site and ongoing operating costs only to suffer a modestly performing branch.

There are many good opportunities to purchase good branch locations. Last year I evaluated surplus bank branch locations in the Midwest. After completing the strategic branch plan and market growth strategies, we evaluated each branch location. Of the 14 locations, we found two that were on target and three that were in close proximity to desired locations. The institution purchased three branches at one-third the cost of new construction and is now pursuing new locations in the remaining markets. These three branch locations support the strategies and, with renovation, will deliver the desired branded member experience.

One reminder: The cost of purchasing a branch can likely be depreciated over 39 years. The difference between a cheap branch in the wrong location and a more expensive branch in the right location is that the latter will be significantly more productive.

Purchasing Headquarters Facilities

Re-using buildings for headquarters use can save a credit union a good deal of money. Spokane Teachers Credit Union in Spokane, Wash., needed a new headquarters facility to support its growth. CU Leaders initially looked for land on which to construct a new facility. During the land search we found a 115,000-square-foot building that was double the CU’s 10-year space needs, but cost a third as much as a new facility about two-thirds the size. Additionally, the other half of the building was occupied by a solid tenant. After investing a few million in building renovation, Spokane Teachers CU occupies a facility that cost 40 percent of a new facility, and leasing to the existing tenant covers the CU’s occupancy cost — certainly a win!

There are many more examples of how existing buildings can be successfully converted for credit union use. There are also many not-so-successful examples. Care must be taken in the planning, acquisition and design. Following are some key questions that should be asked as buildings are being considered:

• Do we have a strategic operations occupancy plan that projects our staffing and space needs for the next five, 10, 15 and 20 years based on a variety of business scenarios?
• Is the building in the right location in terms of staff commuting and accessibility?
• Is the building properly zoned for our use?
• Is the operations location being driven by the desire for a branch in the market? If yes, be careful. The cost of land for great branch locations can be two to four times the cost of good operations locations and much more land is needed.
• Will we be housing high value services at the operations facility, such as mortgage, insurance, advisory services, business banking or wealth management? If so, is the location central to target markets?
• How long will this building support our needs?
• If the building can only accommodate our needs for 10 years, then what happens?
• Can the building be expanded?
• Is there sufficient land for parking today and in the future?
• What is the condition of the facility?
• What will be the cost of required upgrades for seismic, heating and cooling systems, Americans With Disabilities Act, roof, fire suppression, power quality and cabling, parking, landscaping and security?
• What will it cost to make the facility highly productive and a positive experience for staff?
• What are the current and projected characteristics of the neighborhood?
• Are there adjacent staff amenities or will we need to provide them in the building?
• Is there a daycare facility near by?
• Can we enhance the facility to represent our brand to the community?
• Is there significant vacant space? If yes, is this a good leasing market and what will be the return?
• If a developer were leasing this building to a credit union, would it be a good investment?
• What is the all-in cost of purchasing and renovating this facility compared to building a new facility initially and over the next 20-plus years?

The two sets of questions offered above are a starting point for the due diligence process. Spending time and money up front to get the right answers will help ensure success.

It is common to feel pressure from a seller and even your own real estate agent to make decisions quickly. Do not be pushed into a situation where you or the board must make decisions without complete information. Include a reasonable due diligence period in the purchase agreement and include an option for you to take additional time by paying a small monthly fee to the seller to extend the due diligence period if required.

Existing buildings offer significant opportunities if properly located, appropriately sized to support the business objectives, and if they are  the right cost in terms of purchase, renovation and long-term occupancy. With a well-formulated strategic occupancy plan, a solid selection process, the right commercial Realtor, and an experienced planning and design consultant, you can turn other’s surplus into your gem.

Paul Seibert, CMC, is VP/financial services of CUES Supplier member EHS-Design, Seattle.