I spent the day yesterday at the Commercial Broker's Association (CBA) Commercial Real Estate Form.  A great program on relevant issues in today's commercial real estate markets. The one presentation that hit hard was Market Knowledge: Strengths and Weaknesses in Different Segments of the Commercial Real Estate Market presented by Dr. Jim DeLisle, University of Washington Director, Graduate Real Estate Studies at the Runstad Professor of Real Estate. 

My take away: The Commercial Mortgage Backed Securities market, where commercial mortgages were bundled and sold, has pretty much evaporated. The only loans that are being made and will continue to be made are portfolio loans, where the lender actually keeps the loan in their portfolio. The result... very few mortgages are being written. It is much more difficult to obtain a commercial mortgage and the loan to value; the present value, is in the neighborhood of 40% - 60%.  With many commercial mortgages rolling over in the near future, new financing will be a problem. I expect there will be many good opportunities to purchase commercial properties at attractive rates.

More Posts on Buying Office Space

About Buying Office Space

Find Office Space

Good news regarding the office space market seems to be abundant now-a-days. I was just reviewing my Google alerts for office vacancy and office space and came across quite a few positive headlines.  Here are a few:

Jobs will fuel an office market recovery
Michigan Business Review - MLive.com

Twitter hunts for Manhattan office space
The Real Deal New York (blog)

Dubai office occupancy set to go up
Zawya

Manhattan Business Center Expands by Opening Fourth Office Center
DigitalJournal.com (press release)

Record Occupancy Levels for Birmingham Office
officebroker.com (blog)

Brisbane office market bounces back
Queensland Business Review

Commercial real estate recovering
Daily Press

Key Economic Indicators Hint At Local Recovery
SF Weekly (blog)

Recession over--sort of--and recovery underway
STLtoday.com

Office spaces outside of CBD to yield higher rents due to growing demand
Channel News Asia

Amazon's Hiring Spree Will Fill 1.7 Million Square Feet of Office Space in Seattle
All Things Digital (blog)

Office take-up in Edinburgh increased significantly in 2010
Free Office Search

GSA posts 255,000 SF office space requirement
Washington Business Journal

Nordstrom leasing more space from art museum
Seattle Times

Liverpool hindered by a lack of grade A office space
Liverpool Daily Post

Not bad for just a week’s worth of news. Let’s hope this trend keeps going forward.

If you happen to live in a condo, then you'll easily understand why a small business considering purchasing a commercial office condo needs to know about how and when to interface with the Board of Directors of the condo association. However, if you own a small business but have never dealt with a condo board, then you should be aware of the rights and obligations involved before purchasing an office condo.

Just as with any type of building there the common spaces that are mutually and equally shared, a commercial office condo is operated based on the Bylaws developed and adopted by that condo board. One of the requirements outlined in those Bylaws is how often the Board of Directors must meet, what repairs or changes require board approval and what repairs or maintenance can be done by the management team of the commercial condo.

Of course, you want to understand the other portions of the Bylaws as well because these binding agreements control how you can or cannot use the building. For example, you would expect to see in a set of Bylaws that any damages done to common areas by visitors to your office condo are your responsibility. You might also expect to find clauses which prevent owners from drastically changing the exit doors to their condos and other similar restrictions on use or changes.

The Board of Directors of a commercial condo association is made up of elected officers that are owners or designated representatives of owners of units in the building. When a commercial condo is first completed and the building opened for purchase of units, the board may be made up of the developer and other designates that have direct interest in the development. However, after a period of a year or once there are sufficient owners to build a sound, responsible board from, officers are elected from the owners.

You may think, at first glance, that control of everything is given to the selected owners that are elected to the board of directors. This really isn't true at all. The board can, without bringing a motion before the condo owners association members, take care of some expenditures and other business as outlined in the Bylaws. But all major changes are brought up as business during a Condo Association Board of Directors’ meeting, which must be announced formally in plenty of time for owners to notice and attend. In other words, you get a vote in any actions which might impact your business significantly.

In mixed use properties there may be more than one Association involved. Master associations and sub-associations should be used when the users of the units in a single condominium are restricted to significantly different uses. An example would be a condo that has a combination of residential, retail and office uses. In those situations there could be more opportunities for deadlock votes. For that reason dispute resolution to include mediation should be include in the Bylaws.

The best way to interface with the board of a commercial condo association is to attend, or have a designated representative attend, each meeting of the Board of Directors. This way, if any unexpected business is brought up, or if you need to bring up an issue, you'll have your ownership represented.

If you know you need to bring up a topic before the board, it should be sent in writing well before the meeting to the President of the Board of Directors so that it can be placed on the agenda. Taking an issue up on the fly can backfire and fail to get your issue noticed.

An even better way to keep up with what's going on with the board and to interface your business with them is to agree to hold a position on the board of directors. Most condo association board meetings are not lengthy and are critical to the maintenance of the lovely commercial condo office you purchased into.

Related Blog Posts

• Join the Emerging Trend of Office Condo Owners
• Commercial Office Condos - Are You the "Right Size?"

Find a Commercial Condo

Small businesses face competition every day and any edge that can be gained over the huge corporate entities must be taken advantage of in order to compete effectively.  For mature small businesses, there is a new way to gain a competitive edge that wasn’t even an option not very long ago.

Commercial condominiums have appeared on the real estate market recently and small businesses are taking advantage of the benefits. While this option isn’t viable for every small business, it can make a huge difference for those companies that can most benefit.

Young, immature small businesses need lots of leeway regarding office space as they grow and change.  Those companies will likely move through several leased office spaces before reaching their “right size” and being ready to stay in one location and one size facility for the long haul. These are organizations that should remain in the office leasing market for some years to come.

Those small businesses that have found their “right size” and know exactly what they want and need in office space for the coming years can greatly benefit from a commercial condo. The reason to let a company mature and adjust before investing in an office condo is that it may be difficult or even impossible to obtain another condo in the same building in which to expand as the company grows. Businesses that have remained one general size for some time are best suited to investing in commercial condos for office space.

Leasing has lots of downsides. The largest, of course, is the fact that the investor who owns the office space wants to generate a profit from his or her investment. After all, that’s what owning real estate for lease is all about. Other down points include limitations on use, remodeling, even restrictions on paint and carpet color in many cases.

Investing in a commercial condo for small business office space clearly takes the “middle man” – the landlord – out of the picture entirely. The small business obtains financing directly from a mortgage lender, just as is done when a private individual purchases a place to call home.  Small Business Administration guarantees also may be available to allow for a 10% down payment and favorable interest rates.  If you have bought a home, you already know how much less expensive it is to make mortgage payments on a home when compared to leasing a like residence from another owner. The very same is true of office condos.
 
The small business becomes responsible for all repairs on the interior of the commercial condo because there is no landlord to turn to should something break or stop working. A small prudent reserve for such situations is wise on the part of any business purchasing a building, whether a condo or more traditional office space.  In the case of leasing, the landlord is already charging an amount to hold toward repairs in the lease payment each month. Instead, the small business can invest the money in an interest bearing bank account for earn money on the reserve held for repairs.

The business is also responsible for payment of all taxes on the unit. Here again, the landlord of a leased office space has taken this sum into account when setting the monthly rental fee. It’s just a matter of managing your budget so that making tax payments on a timely basis will not create a hardship on the firm.

In the next post about commercial office condos, we will look into the condo association board of directors and how the small business can effectively deal with and participate in that area of commercial office condo ownership.

The Buying Process

Leasing vs Buying Comparison

Related Blog Post: Join the Emerging Trend of Office Condo Owners

Office space is critical to operating any type of business and many small businesses simply can’t afford to purchase a building in which to operate. Renting is, of course, a great option, but there’s no equity build up in renting – except for the landlord. With an office condominium, a small business owner can purchase office space, build equity, and even sell the office space if and when desired.

The concept of commercial condos is a rather new one. It provides the owner with more power to change the interior space to make the interior setting most conducive to their particular business. They come in all sizes and classes of buildings. Because the commercial office condo is purchased, the business owner is not going to be hit by a lease change in rental rates. There are lots of benefits to the small business such as tax advantages and residual value.

Ownership to Lease Comparison

When leasing:

• The lease renewal offers the landlord the chance to increase rents. Sure, rent could go down, but more often, it goes up and up over time unless the rental market is extremely soft.
• At lease end, the small business owner must either accept the new lease terms or find a new location and bear the expenses involved in moving, as well as the business disruption.
• Depending on lease language, a lease renewal might not be available if the landlord decides to sell the building.
• Much of the interior of the business office is controlled by lease language, leaving few options for the business owner for customization.
• Rent is a liability in the accounting process.

When buying a commercial condo:

• If purchased on a fixed interest rate mortgage, the payments for the property will not change over time, allowing long-term budget and financial planning.
• Some restrictions apply to use and interior change per the laws of the condominium association, but they are usually not nearly as limiting as when renting.
• There is a fee paid for upkeep and maintenance of common areas, sometimes even including common lobby assistance.
• The commercial condo becomes a business asset rather a liability.
• The office condo ownership shares, in the case of partnerships, can be legally willed to the other partners so that the business can proceed without disruption.

The Condo Association

Commercial condos, like residential condos, are operated and governed by a Condominium Association made up of condominium owners. The members operate within a set of Bylaws adopted by them and which must meet certain legal requirements. If considering the purchase of a commercial condo, it is very important to read and understand the governing documents such as the associations’ Covenants, and Conditions and Restrictions (CC&Rs). These documents outline exactly what is permitted and restrict, as well as the rights and duties of the owners of the commercial condos in the buildings. They also outline what the association can be expected to be responsible for in return for the monthly condo maintenance fee paid by each office condo owner.

Conclusion

We’ll be looking at more aspects of commercial condos and how they can benefit the business owner in the next updates. This concept is a great way for business to stop paying rental fees and build equity in real property while providing workspace for their operations.

Find Office Space