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In our office space Blog we have discussed a great deal in the past about how troubling of a time it is for the Commercial Real Estate market thanks to overly abundant unemployment and the recession. With every challenge there is usually an opportunity. In this case, a down markets is a great time to buy commercial real estate. The old adage of buy low and sell high can be applied to this time period. Of course, it is always scary to get into an investment in a down market, but if you can do it now, you will undoubtable be near the bottom of the market with no where to go but up.
One of the best ways to get into commercial real estate is to buy property that your company can use. One of those ways is to buy a commercial condo. The SBA may even be able to help too with a loan guarantee that would allow you to only put 10% down. A great use of leverage.
"Many people understand what a residential condominium is because the concept has been around for generations. In order to understand commercial condos (also called "non-residential" condos), we can apply many of the residential guidelines, but with the added benefit of potentially increasing profits for your business.
Following is a simple list of frequently-asked questions that will give you a quick and thorough education about commercial condos.
As a business owner who currently leases my workspace, how would I benefit from buying that space?
The most obvious benefit is that you'll own the property rather than rent it, so over time it will gain equity and become a valuable long-term asset. If you leased your 1000 square-foot work space for $30 per square foot for 10 years, you would spend $300,000 (excluding any annual increases) during that time, but all that equity would go to your landlord instead of you. If you'd purchased the space, each year you would be paying yourself and increasing your equity in the property. You could also have multiple tax benefits that you'd not be able to take as a tenant, such as mortgage interest, property tax deductions and deductions for repairs and depreciation. As an owner rather than a tenant, you'll have complete autonomy and freedom to create the exact space you need for your work. You can redesign and remodel to your heart's content.
What are some of the less obvious benefits?
If you're moving into a new location, a lease option (leasing now with an option to buy later) can lock in the purchase at today's price. And if you purchase more space than you need, you can rent out the remainder. Those rental units will pay for themselves while building equity for you.
How do I purchase a commercial condo?
Many business owners don't realize that while commercial banks are hesitant to make loans, the Small Business Administration (SBA) is actively offering up to 90% financing to established businesses for the purchase of office, industrial and retail space. There are many financing options available, but the financing can be complicated because the lender won't necessarily understand what type of property it's dealing with. Is it residential? Commercial? Retail? What kind of loan is it? That's why we suggest that you work with a trusted banker or broker who can bring in a team of experts (accountants, lawyers, architects, as needed) to help you find the best loan and the best property.
Will I have to pay property taxes?
Yes, because you are the owner of a piece of property. But like a home loan, the property taxes can be rolled into your monthly loan payment.
Some residential condo complexes have homeowners associations and dues to pay. Is this true with commercial condos?
Yes, there will be an HOA (homeowners association), and there will be monthly dues. But these dues pay for property maintenance, landscaping, insurance, professional management, and more. If you owned a house, you would also be paying for these things. One advantage of an HOA is that it guarantees that these maintenance issues will be addressed and that the property will be well cared for.
How are the common areas like parking lots, lobbies and walkways maintained?
Property maintenance will operate the same way it did when you were a renter. The developer, or owner of the property, will turn the management responsibilities over to the HOA and the board of directors (which is usually made up of individual owners like yourself). Usually a property management firm will be hired and paid from the HOA funds.
What does the board of directors do, and how involved will I need to be?
The board makes day-to-day decisions about caring for the property. For example, the parking lot may need to be re-paved, or the sprinkler system may need to be upgraded. The board prioritizes these various needs, seeks bids from vendors and makes sure the work is completed. As an owner, you may choose to serve on the board or not. It's not required."
ST. LOUIS, April 14 /PRNewswire/ -- The latest data for the first quarter of 2010 shows that demand for U.S. office space continues to improve, according to Cassidy Turley, one of the largest commercial real estate service providers in the U.S.
Net absorption registered at negative 3.2 million square feet in the first quarter of 2010, marking the 5th straight quarter of decelerating declines.
"The first leg of the recovery begins when the office market returns to positive demand. The trajectory of recent job growth figures indicates that the U.S. economy will be consuming office space again by the second or third quarter of 2010," said Kevin Thorpe, Chief Economist at Cassidy Turley. "In other words, the office sector has not yet turned the corner, but it is at the cusp."
Despite decelerating declines in demand, the report reveals that the national office vacancy rate increased from 16.4% in the fourth quarter of 2009 to 16.6% in the first quarter of 2010, which is the highest vacancy rate since 2003.
"National vacancy remains elevated; it is now 260 basis points above its historical average," said Mr. Thorpe. "With a myriad of high-quality options for tenants to choose from, effective rents will remain low until the excess space is absorbed. It is a classic inventory overhang problem that can only be resolved with steady economic growth and time."
Net effective rents remained flat in the first quarter of 2010 at $23.88 – marking the first time in five straight quarters that rents did not decline.
"Based on the vacant stock figures, the U.S. is no less than 2 years away from seeing healthy rent growth again, but certain pockets within top tier markets will firm before then," added Mr. Thorpe.
Blogger's note: I wish the economy were improving. What we are told and what we see are two differnt things. I think we still have more declines in rental rates as the commercial market continues it's downward trend for at least the remainder of the year. There are still a lot of building owners with refinanincing needs coming up this year that are not going to be able to be met. I do not believe we have hit bottom, yet.
After years of property owners conducting due diligence on the financial wherewithal of their tenants, commercial real estate agents say corporate clients are turning the tables when it comes to financial scrutiny.
With commercial real estate values down by as much as 40 percent nationwide and the number of foreclosures still growing, tenants in the market for new space now often conduct the kind of financial background checks of their new landlords they once might have been more likely to face themselves.
Dick Cassetti, a local commercial broker who does mostly tenant representation work, understands firsthand why.
Cassetti said one of his clients has given its landlord an April 6 deadline to make good on a promise related to tenant improvement money the client says it never received.
“Any large tenant of 20,000 square feet or more would be foolish if they could not get representations and guarantees that (their landlord) has money in the bank,” Cassetti said. “If the landlord is not willing to escrow the funds promised to the tenant for the build-out, then I as a tenant would look for a different landlord.”
It’s a very different reality from five years ago during a real estate boom, when such measures by tenants were relatively rare.
The motivations for tenants stem from the negative trends in real estate finance...
This office leasing issue is not exclusive to Pittsburgh. Office space tenants around the world need to check on the ability of their prospective landlords to perform. How do you go about it? The best way is to have an office space tenant rep by your side to guide you. They deal with these issues day in and day out. They protect you and make sure you avoid costly mistakes. Their services are free to you. It is a no lose proposition.
Shadow Office Space is office space that is currently under lease by a tenant, but which is not being used due to layoff of employees. It is also not listed for sublease or identified as available space. This could be space that a company is holding so that as the economy comes back they will have the space they need to get back to their “normal” workforce. Most office leases are long term leases and shadow office space could be that space within a leased premise that is not being used, but is not suitable for sublease due to the layout and / or security concerns of a company. It is also space that will be put on the market, but has not yet been offered. This is space that is hidden from the vacancy rate statistics we hear about. It can be compared to the unemployment figures that come out, but do not include the underemployed or those that have given up looking for a job. In other words, it should be added to the published vacancy rates in order to determine the true office vacancy rate.
Shadow office space will most likely the first space to be filled as the economy comes back. This will also distort the absorption rates. With no record of it being vacant, there will be no record of it being filled with new employees. When the office recovery finally does come, it will be under stated.
How much is out there? This is a very tough question to answer without a large survey of businesses to determine their current space usage related to their leased space. Based upon our discussions with local OfficeFinder Tenant reps, the true vacancy rate, including shadow space would be 1% – 2% higher than the stated rate in any given market. That means that the Manhattan market would have in excess of 2.5 million square feet of shadow office space; not an insignificant amount of space.
From our recent post, US Office Vacancy Rate Hits 16-year High, the stated vacancy rate was 17.2%. Including a Shadow Space factor, the real US Vacancy Rate would be close to 19%.
What this means to tenants is that there are lots of great opportunities that they can take advantage of. One of the biggest problems for them is the ability to cull through the many options to find the right alternatives. That’s where engaging a tenant representative comes in. They know the market. They know the landlords. They do this every day and can help tenants find and negotiate for the best options available. Best of all, tenants get representation at no cost to them. Listing agent fees are split to pay for their services.