Budgeting for Growth

The holiday season brings warm times with family and friends, good food and some vacation for most. The holidays also add many tasks to our already busy schedules. One task critical to each credit union is budgeting for next year. The budgeting process must consider how business opportunities and climate drive costs for staff, technologies, products and services, growth and its associated operating costs. Your second biggest cost (after staffing) and the least flexible cost is facilities occupancy.

During the holiday season, our phones at EHS are busy with questions about how to budget for next year’s growth. Let’s look at a few of the most typical questions. Please note that the costs reflect national averages, and that site variables can be considerable.

What is the average cost of renovating a branch facility?

Renovation costs depend on the condition of the facility, size and scope. Many credit unions have developed a prototype branch that defines a kit of parts for each location. The parts are applied to different levels of renovation based on the value of the branch and the expected return on investment. But in general, a credit union can expect a 2,500-square-foot branch interior with no facility operating issues to range in cost from $50 to $250 per square foot.

The range depends on key variables that may include:

• HVAC system overhaul or replacement ($25,000 to $150,000);
• code requirement to upgrade facility to Americans With Disabilities Act  standards based on percentage of space impacted and/or cost ($15,000 to $35,000);
• maintenance issues;
• added lavatory ($10,000 to $18,000);
• asbestos removal ($5,000 to $40,000);
• temporary relocation costs ($35,000 to $60,000);
• landlord fees (10 percent to 15 percent of project cost);
• equipment and furnishings (which is a significant variable due to potential of  video and information kiosks);
• merchandising ($10,000 to $65,000 depending on type of systems and who is generating content); and
• exterior renovations.

We also recommend including a contingency of 10 percent in every project estimate.

What is the cost of building out a store front location?

The cost range for this kind of 2,500-square-foot-branch is a little higher, $175 to $300 per square foot. This is because of the potential for fit and finish variables and the inability to reuse existing equipment or furnishings. The variables are similar to the renovation costs listed above with the addition of exterior signage ($20,000 to $45,000) and the addition of a drive-thru ($35,000 to $75,000).

What should we expect to pay for leased space?

Lease costs are based on demand. Demand is driven by location, economic environment and competition for the site. For example, the lease rate for a 2,500-square-foot branch in Manhattan or on Pennsylvania Avenue in D.C. will be $85 to $115 per square foot, while a suburban location outside these locations will range from $35 to $58 per square foot. Strip mall location lease rates vary as well. In Seattle the range is $25 to $55 per square foot. In Missoula, Mont., rates could be as low as $18 to $35.

There are lease costs in addition to square feet. An operating cost is charged on top of the lease rate. For most fully serviced locations, the rate is $6.50 to $8.50 per square foot per year. There will be rate escalations to consider. Sometimes you can get a fixed rate for a number of years with incremental jumps. An average increase per year is most typical. Figuring 3 percent per year is a reasonable average.

What is the cost of a new free-standing branch?

The two key factors are land and the building. Land values are very difficult to generalize. In most markets, a great site with good access or with a big box retailer (Walmart, Costco, Target) at the entry will cost $30 to $60 per square foot. Lesser locations will range from $15 to $25 per square foot.

Often great sites are not for sale, but for lease. This can reduce the initial cost, but over time the costs can quickly escalate. If you lease a site, the investment you make in the building will be lost unless you can renew your lease. This creates a weak negotiating position.

Construction costs range from $275 per square foot for a basic building to over $400 per square foot.

Interior variables remain the same. A free-standing building creates greater budgeting risk. Here are some additional variables to consider

• traffic mitigation ($15,000 to $175,000);
• change to traffic mitigation fee ($10,000 to $45,000);
• change to utility connection fees ($4,000 to $45,000);
• accessibility issues;
• change in utilities used;
• requirements for development (trees, sidewalks, amenities);
• storm water retention requirements;
• storm water system sharing fees;
• development assessments;
• monument sign;
• shared access maintenance cost; and
• site lighting.

It is risky to base big expenditures on ballpark estimates. When purchasing a piece of property, it is best to include potential site development costs in the due diligence process so you do not have to suffer a big negative surprise that could add 10 to 50 percent to your real land cost.

What is the cost of developing a new headquarters?

Like freestanding branches, the primary costs are land and building. The cost of headquarters land should be significantly less than land for branches as you are not looking for a retail site.

For example, if you are considering building a 50,000-square-foot headquarters, you will likely want three to five acres for surface parking and landscaping. In most markets, office land is 50 percent the price of retail land.

Don’t get caught in the trap of estimating low and then being required to find land at the lowest cost. A recent client asked for assistance figuring out what to do with an inherited beautiful new headquarters built on very cheap land with no visibility and poor access. No one would lease their expansion space and the value of the building was 75 percent of its cost.

Building costs can vary widely as well. Shell and core construction will range between $175 and $250 per square foot. Building out the interior will cost $75 to $175 per square foot, depending on the fit and finish.

Variable costs are similar to those for a new free-standing branch, with increased emphasis on the selected furniture system, which is a big cost component of every headquarters project. A few other variables are cost of relocation, renovation of your existing furniture system or sale for a small profit.

Long-term use can play into costs as well. Will you be building out unused space into an area already equipped for HVAC, so that you can lease to others? Or will you leave the space raw until a tenant is found or you occupy the space? Part of the long-term cost is the operating cost. This will range between $5.50 and $8 per square foot.

When getting prices from others, be careful of their motivations so excessive optimism or the desire to provide a pleasing price that can later be increased through change orders does not set you up for embarrassment.

Getting the cost right is important in terms of budgeting and your professional performance. It also influences decisions about how much your credit union wants to invest in a specific opportunity. You do not want to promise the board, members or staff something that must be withdrawn when the actual costs come in.

Budgeting sets the stage for your successful operation and your ability to grow and prosper. The right process and players will ensure you are successful today and next year when the projects are complete.

Paul Seibert, CMC, is principal/financial and retail design for CUES Supplier member EHS, a NELSON Company, Seattle.