Facility Solutions: Build, Purchase or Lease?
What is the best strategy for your new headquarters?

By Paul Seibert, CMC

December 15, 2009

CUES' Credit Union Management's online-only "Facility Solutions" column runs the third Tuesday of every month. In each installment, author Paul Seibert answers a question posed by a CU leader during research for CUES Complete Guide to Credit Union Facilities.

Q: We need a new headquarters. Should we build a new facility, purchase an existing building or lease?
This question is often one of the first asked by a credit union board when it realizes it can no longer be efficient, productive, and support its growth objectives from its existing facilities. Answering this question prematurely may steer the credit union in the wrong direction, missing options that would create more benefits in the long term. Answering this question should be delayed until there is a clear understanding of all the variables involved: business and growth strategies; timing and priorities of delivery systems vs. operations facilities initiatives; and how the brand impacts all decisions.

Credit unions have many occupancy options. We typically find five to eight occupancy strategies that may support stated business objectives. When these strategies are fully explored, we always discover significant differences in how each supports the business and brand objectives, efficiency and productivity, flexibility in meeting business variables, and the resulting cost. For example, we recently projected the difference between building a new facility, leasing and purchasing, and remodeling an existing building over the next five, 10, 15 and 20 years. In this instance the difference between building a new headquarters vs. leasing was over $10 million in favor of building. The variables are many and most are specific to each market and real estate opportunity.

Building a new facility is often the most desirable strategy because of its many advantages. It provides a modern building to support advanced technologies, offers a healthy work environment and operates with highly efficient systems that can reduce costs. A new-build facility can provide a strong brand image to members and the community, projecting commitment and success. Building a new facility is also the most fun for boards. There is an element of excitement involved in purchasing land, designing a building, and being part of creating a large, tangible representation of a credit union's success. There is some risk, however, in rushing into the decision to build a new facility, even if it may be the right answer. In early discussions a new facility should be considered only one of many options.

Leasing may be an attractive option for some credit unions. Existing buildings can be sold and the space leased back to generate capital. In the short term, leasing may be a reasonable strategy; over the long term, owning your facilities is a better financial option. Leasing is typically the least expensive occupancy option over the first six to seven years but, subsequently, becomes significantly more expensive. When occupancy costs are projected out over 15 and 20 years, leasing typically costs millions more than owning. And at the end of the occupancy cycle, there is no investment that can be sold at a profit to support the next cycle of headquarters needs.

As the economy has tightened, more credit unions are considering purchasing and renovating an existing facility. Over the past five years, 40 percent of our headquarters work has been in renovating existing buildings. The benefits have been substantial. All the advantages of a new building can be gained if proper due diligence is conducted before the purchase, and appropriate investments are made. For example, we helped a credit union compare the cost of building a new headquarters to purchasing and remodeling an existing building. The new headquarters was going to cost $8.5 million including land, providing a 10-year building and a 20-year land option for future construction. The existing building represented 220 percent of the space needed for 10- year occupancy, and half the building was fully leased. The cost of the building was $3.5 million, plus $1 million in renovations. Not only was the cost about one half the cost of a new building, the credit union was able to cover nearly all operating cost from the lease payments. This was a great real estate decision. In the current economy we are finding similar opportunities in every market.

Remodeling an existing building can be a great way to save money and recycle existing facilities, but credit unions need to be careful while doing the options analysis. Some institutions have purchased existing buildings without a comprehensive investigation or a clear understanding of how a building can impact credit union operations and efficiency. A few years ago a credit union purchased a facility that seemed to be good value, but then found substantial improvements were needed for the  required seismic upgrades, fire suppression and Americans With Disabilities Act requirements, in addition to all new systems. The final cost was more than the cost of building a new facility.

Renovating and expanding existing facilities is another important option. You may be able to improve building efficiency with minor modifications that will allow you to remain in the facility for another two or three years. You may also be able to add space in an adjacent building as long as you own sufficient property.

Deciding which real estate and occupancy strategy is best for your credit union is a very big decision. Boards need to understand all the occupancy options and how they will impact performance and the bottom line. They need to know the cost of leasing vs. owning vs. building new or remodeling, and all the variables. With this information in hand, they can then answer the question of whether building a new headquarters, purchasing an existing building or leasing is the best option, secure in the knowledge that this crucial and costly decision will ensure a positive legacy for the next 10 to 20 years.

Paul Seibert, CMC, is VP/financial services at CUES Supplier member EHS Design, Seattle, and the author of CUES Complete Guide to Credit Union Facilities.

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