The decision to buy, build or lease distribution facilities really comes down to the same factors that each of us face in choosing our own homes. Often it is a series of compromises between needs, wants and what is available in the wallet. Building a new home is usually preferred, but not always affordable. Plus you have to have a place to live while the new home is being built. Purchasing an existing home allows you to move in almost immediately, but may require some changes to suit your needs and tastes. Renting a home allows a shorter-term solution, but offers little flexibility over what can be done to the living space.

In a similar manner warehouse managers must take these and other factors into consideration when they find suitable space for distribution. Leasing, buying and building all have their advantages. Often it is a company's bottom line that ultimately is the overriding factor.

"It is really a financial decision and involves more than just the building," says Tom Fitzpatrick, vice president of technical services and planning distribution for television shopping channel QVC. "You also have to consider the balance sheet and how much ready cash you have."

While it is not a hard and fast rule, publicly held companies tend to lease their distribution space. This frees capital for growing the business and allows them to list fewer fixed assets on their financial statements.

"Leasing provides a greater return on assets and looks better to investors," says Bob Silverman, president of Gross & Associates, a Woodbridge, New Jersey distribution and logistics consulting firm (732-636-2666). He says that lease arrangements can also give a company more flexibility over future distribution decisions. If a company outgrows a building, it can negotiate an escape from the lease or find someone to sublet the space.

The amount of building done in the 1990s also means that there are more facilities available today, resulting in lower lease prices.

Privately held companies tend to buy or build their facilities. For them, a fixed asset is a plus, providing tax advantages and a long-term investment that will typically appreciate in value. The building they purchase may be an existing facility or a new structure built on spec.

The biggest advantage to building is that the facility can be designed to meet the specific needs of the company. This, however, takes time that may not be available in an ever-changing distribution marketplace.

The products to be distributed also play an important role in the decision to lease, buy or build. Product size, shape and turnover affect the materials handling systems needed for processing orders. Simpler operations can find a home more easily than those that require complex automation. There are many rack-based buildings available to lease or purchase for those distributors handling only pallets and drums. On the other hand, it isn't quite as easy to find existing facilities that have automated storage and picking systems for handling complex piece fulfillment.

"Companies that handle hazardous materials or that have special fire suppression needs limit their opportunities," says Patrick Sedlak of Sedlak Management Consultants (330-908-2100) of Richfield, Ohio. He says that other hurdles to finding a suitable existing building may be its location, availability and the amount of retrofitting required.

Smaller buildings are easier to find. Few 500,000 square foot facilities are built on spec. Most companies requiring large buildings realize it is easier to build.

Time is also a consideration. A company can occupy a leased building almost immediately, whereas a good 18 months may be required to build a suitable facility. Time is money. Not only do you not have use of the building while it is being built, but the design and build phases also require a large investment in staff time. A limited project time may be a critical factor in the decision to move into an existing facility.

Grocery Gateway is one of North America's top online grocers. In 2001, the company moved to an existing facility just outside of Toronto to distribute groceries directly to customers in the metropolitan area. The new distribution center is leased from the Canadian Armed Forces, which had previously used the building to distribute military supplies.

"Our decision to lease a building really has to do with capital management," explains Claude Germain, chief operating officer. "Real estate is not a core competency for us. By leasing, it allows us to extend our equity."

Germain says the driving factor in entering its 10-year lease on the building was location—a place that can easily reach its customers. Height of the building, the amount of dock doors and available power were also considerations.

Many start-up companies, such as Grocery Gateway, find leasing the most effective option for their distribution needs. Leasing does not tie up capital that can be invested in materials handling equipment, trucks and inventory. It also allows them to get to market quickly.

Speed was a critical issue for drugstore.com when it entered a lease for its building in Swedesboro, N.J. in 2000. The online supplier of health and beauty products was able to begin distribution from the facility in only two months.

"As an e-commerce company, we were in a hurry," recalls Chris Hauser, vice president of operations. "We gained nine or ten months by leasing and we did not have to sink capital into fixed assets."

drugstore.com originally had a third party provider handling its distribution, but instead decided to bring it in-house. Hauser says this gave the company greater flexibility to change its handling techniques and methods. The company searched for about 6-8 months to find the 290,000 square foot facility it now leases. Hauser worked with real estate agents who were provided the basic needs, then he went out to look at the most promising sites "You have to go kick the tires," he says.

Buying an existing building provides a lasting asset for a company. Real estate is usually a good investment in any economy, plus there are tax advantages. Owners also have greater control over their facilities. Large companies with multiple facilities typically have a real estate division that handles the search and selection of existing buildings, but this role can also be performed with consultants or real estate professionals.

"If you feel the building will be worth more in 15 years and you want to roll the dice in the real estate market, then it may be an advantage to own the building," says Silverman of Gross & Associates.

Care must be taken when selecting a building that it will not cost more to purchase and then reconfigure the structure than it would be to invest in a new facility.

While theoretically speed to market for purchasing an existing building is similar to leased facilities, it is best to take additional time in selecting a building that will have your company's name on the deed. It is much easier to get out of a lease than to sell a flawed building.

"If you have a current distribution operation, but wish to move it, you really need 18 months to make good decisions," says Sedlak. "But if you only have nine months, then you just have to lock and load."

He says there are a lot of existing facilities in the marketplace now, many of which are facilities left from the dot-com bubble and from companies that have consolidated during tough economic times. Low interest rates have also encouraged many developers to build facilities on spec. Those same low rates also benefit buyers of those buildings when they look for their own financing.

Nike owns and also leases distribution centers. For instance, it has leased a shoe DC in Memphis since 1982 and also bought a facility nearby to handle apparel distribution.

"Some companies may not want the liability of ownership on their books, but I think that owning is beneficial," says Mark Dennington, facility planner and engineer for Nike.

Often an existing building may be found within a company's own holdings. ValueVision, a fulfillment company that provides distribution for Polo.com, Shop NBC and the Museum Company, among others, had a vacant facility in Kentucky that it retrofitted.

"We already owned the asset, so it made sense to use it," says facility director Dan Edmonson. "We did not have to spend time searching for real estate; we by-passed all of that."

Auto Parts retailer Pep Boys found a spec building near Indianapolis that met its needs for distribution to stores in the Midwest.

"The shell and roof were in place, but the rest still had to be done when we bought it," says David Schneider, director of engineering logistics. "This allowed an incredibly quick turnaround of less than six months."

Schneider says that spec buildings often are designed to be very flexible and if a company can enter an agreement before the structure is completed, then they can incorporate their needs into the design, such as location of dock doors.

"It is less expensive to get into a spec building because the developer is building several at a time and can be more efficient than with a design-to-suit," he says.

While Pep Boys initially purchased its building, the company turned around and sold it to a third party, then leased it back again. This is an option that many companies are going to, as it gives the benefits of a designed building without the drain on capital. Schneider says this same arrangement was also used for another DC built in New York.

"Leasing back allows you to do more with your capital. Without it, we would not have been able to afford the pick-to-light system in New York. Also, warehouse rent can be written off as an expense. The depreciation schedule does not provide the same tax advantages," he says.

Building your own is still the way preferred by most companies to acquire a new facility. It allows the owner to match the structure to the product being distributed.

"The optimum approach is to design a building around the materials handling, but often building new is not done because of the time required," says Silverman.

Companies that build their own can also take advantage of tax incentives and government money available for worker re-training.

IKEA, the Swedish furniture retailer, chose to build new for its Lebec, California distribution center.

"It was hard to find an existing 850,000 square foot facility," says Jim Leddy of IKEA Distribution Services." Building gave us the design that we wanted, plus freedom, flexibility and security."

IKEA operates a property division that builds its facilities then leases them to the distribution arm. In a departure from most distributors that own their buildings, IKEA uses a third-party provider to manage the facility.

QVC also had difficulty finding an existing building when it built its 1.3 million square foot facility in North Carolina.

"If we were looking for a simple 100,000 square foot rack and lift truck operation, then we could lease the space," says Fitzpatrick. "But we are not in that position. We have a high-volume operation and a lot of custom equipment. You do not find that on the market."

Fitzpatrick emphasizes that the decision to lease, build, or buy really has to be made on a case-by-case basis.

"What was good two years ago may not be best two years from now," he says. "It is good to know there are options."