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
Buying Office Space , Commercial Condo , Commercial Real Estate , Lease vs Buy , Office Building Sales , SBA Loan
I attended the Associated Realty of the Americas conference this week in Seattle. They have a very dynamic group of top producers involved in their network of agents in the US, Canada and Mexico.
One of the people I met there introduced me to a new form of financing I was unfamiliar with, securities based loans. These are loans that are collateralized by publically traded US or foreign securities. They can be used for any purpose, including real estate.
- Fixed rate interest rates of between 2.5% and 4.5%
- Up to 80% Loan to Value Ratio of the portfolio
- Low origination fees and no other closing costs
- Loans are non-recourse
- Loan terms of between 3 and 10 years
- Minimum loan amount is $100,000
- Maximum loan amount is unlimited
- Can be funded in as little as 10 days
- All loans are SEC and FRB compliant
With the credit market at tight as it is, this can be an alternative to be able to obtain favorable financing terms.
For more information
Buying Office Space , Investment Real Estate
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
- 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.
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
Buying Office Space , Commercial Condo , Lease vs Buy , Office Building Sales , Office Space
There has been talk for many years about the changing workforce and how to best provide office space to the emerging knowledge workers. Office space is usually the second biggest line item expense for businesses after salaries. It is a big deal if a company can reduce their office space needs. Many small business are using a variety of options top cut their costs. Theses include co-working space, virtual office space and executive suites on as as needed basis. Larger businesses are starting to get into the concept with hot desking or desk by reservation systems that allow workers to reserve a desk in an office on an as needed basis.
One of those companies doing so is IBM. They realized that on any given day the traditional office was anywhere from 40% - 60% empty with employees out doing business.
So IBM took a drastic step. With a desk-sharing scheme, and by allowing employees to work remotely, they reduced their downtown Toronto office space by 40 per cent consolidating three offices into two in a pilot program over the past few years. The company has even devised a reservation system that employees use to book desks from the office or online, and soon from their BlackBerrys.
IBM is now a workspace “evangelist,” leading other companies on office tours.
“Now people are enabled to work three days a week instead of five days,” says Brodie, who works from his Uxbridge home and goes to his Markham office only for meetings. The Markham office, IBM's Canadian headquarters, houses software development, services professionals, sales and corporate marketing, and the bulk of the employee base.
“Young talent expects to work this way. Older folks want to ‘retire' to the cottage and work from there.”
It is trend that is starting to gain momentum. Businesses end up with happy employees and reduced overhead for office space. What's not to like.
For more information on the future of the workplace see The 21st Century Office Space
Flexible Workspace , Office Space , Office Space Design
Maybe the landlord (or his broker) shouldn’t be considered an adversary when negotiating a lease. If you understand their needs and wants you may more likely be able to achieve a win-win for both parties. After all, you are both attempting to get the best deal for your respective side.
Tenants spend a lot of time, some more than others, on clearly defining their needs. They determine the location, size, build-out, cost, image and more. The key to a great deal is making sure what you want is what the particular landlord can deliver. Not all landlords have the same agenda or live by the same rules.
Have you ever been at a casual business lunch, maybe in the gym working hard to shed a few pounds or simply standing in line for that double mocha cappuccino when the guy next to you starts talking about his firm’s latest and greatest real estate deal? You can tell he’s proud of the results. Unfortunately, his knowledge of the deal may likely based on the abbreviated summary presented to him at the last manager or partner meeting. Unfortunately for you he just planted an annoying seed in your head. You stop thinking about anything but the deal your firm just signed and you can’t wait to get to the office to look at your new lease. The fact is, that guy may not have all the correct information and details about his deal but it sure set you off on an aimless journey. You now start to wonder if you really did you get as good a deal as you first thought.
The core of the problem is that no two deals are ever the same -- even in the same building. Although the monthly rents may be within pennies of each other, the deal points may vary across the spectrum. The differences often depend on specific issues known only to the Landlord. This can include idiosyncrasies of the particular suite, the building or maybe the landlord’s financing. It likely has nothing to do with you. So, don’t take it personally.
Several years ago we assisted a client in leasing a portion of an oddly built suite. The portion they intended to lease worked well for them if the landlord would just put up one wall, re-carpet and repaint the suite. Quick deal…done and done.
At the same time, I had another client looking for space about the size of the remaining portion. However, that section required a lot of improvements to meet most tenants’ needs. When I approached the landlord basically with two deals at the same time they were willing to do well over $45/SF in improvements, a high amount for a small space. From their perspective they were looking at what the cost would have been to do both suites while putting most of the cash into the odd shaped one. The win-win was that both clients got a space built out to their needs while the landlord signed two new tenants with minimal down time or lost rent.
In today’s market the concessions come in all sorts of shapes and forms. Some creative landlords offer reduced rent for the first year while others may offer abated rent. Others are more aggressive on their asking rates. The landlord was quite upfront in one recent renewal transaction we handled. He needed to keep his asking rate at a specific level based on the terms of his loan. With that in mind and knowing the market value as compared to other properties and other new deals recently completed in the same building we put a total dollar package together that would work for the landlord. We then used abated rent spread through the term so the total value of the transaction equaled fair market which worked for my client. The landlord got his rate and the client paid what was fair over the term.
The guy standing in the coffee line telling you about his deal may not even know the specific deal points of the lease and, in particular, how all the moving parts fit to make the deal work.
Every deal starts with a market value. That’s just the reality of real estate. Beyond the basics every deal has its uniqueness. If you can get answers to some issues it might help such as:
- Does the landlord own the building outright?
- If not, how flexible is his lender? Some lenders need to approve all deals, deals that impact loan to value while another may need approval of deals over a certain size which could impact the landlord’s flexibility.
- Does the owner tend to sell or keep their properties long term?
- How long has the particular suite been empty?
- Is the present build-out considered “standard” or would it require improvements for most any new tenant to occupy the space?
If you look at your business plan and carefully identify your real estate needs you can approach the landlord with the simple question, “Can you do this?” While the path to “yes” may not be a straight one, understand there are many issues facing the landlord which can allow them flexibility to make your deal or conversely become impediments forcing you to move on to another option. Be strong in your negotiations but also learn to be flexible.
Lease Negotiations , Office Leasing Tips , Office Space Negotiations , Orange County Office Space
Guest post by our Orange County, Ca Office Space Tenant Representative