On the surface, buying an office condominium makes a lot of sense. There are definite advantages to buying vs renting office space. Buying ensures a stabilized rental rate and some other financial benefits. However, potential drawbacks also loom, and it requires your due diligence to determine the feasibility of such a purchase. For Chuck, an office condo proved to be the right idea at the wrong time.
Ten years ago, Chuck bought an office condominium to house his law firm. What seemed like a great idea, almost financially ruined him. He and his partners buckled under the monthly payment and other fees. The tension created by the financial difficulties helped fuel the dissolution of the law firm. Facing bankruptcy, Chuck recently had to let the office condo go back to the bank. So, what went wrong here? What can other business owners learn from Chuck’s experience?
Economic timing can make or break an office condominium investment
James Hill of West USA Commercial says, first and foremost, what hurt Chuck was his economic timing. Ten years ago, the real estate market tanked along with the rest of the economy. Just about any commercial or residential real estate deal made right before the crash, proved dicey, at best. Chuck purchased the office condo when real estate prices were high. He and his partners languished under those premium payments as rents in the area and their business sank with the economy. No one can predict with a surety, where the market is going, but Mr. Hill says potential buyers benefit from talking to people who know the area and the industry. He advises you to do some research and get opinions from other investors.
Office condos can make sense for owner/occupants
Buying an office condominium can actually make sense for someone like Chuck because he made the purchase with the intent of being the owner /occupier. Office condos allow owners to lock in a stable rate that is impervious to surrounding rents on the rise. Buyers who invest in an office condo located in a hot area for development, can find themselves sitting pretty on their unchanging payment, while rents around them soar. There are tax advantages as well. Office condos allow owners to write off depreciation along with other expenses.
What are the office condominium’s monthly fees?
Mr. Hill brings up another issue that needs to be scrutinized when considering an office condominium. It is also important to find out the property’s monthly maintenance fee. This fee, sometimes called an HOA (Homeowners association) or CAM (common area maintenance), includes your portion of the building’s insurance, taxes, electricity, and maintenance costs. Buyers pay this fee in addition to the base rent.
It’s crucial to practice due diligence here and find out what capital improvements may be on tap. Will you be required to pay for those in addition to the monthly maintenance fee? Is there enough money in the fund to pay for those improvements or any unexpected expenses, such as new roof or air conditioning system? You want to make sure enough funds have been set aside on a monthly basis to ensure money is there to make any capital repairs the property may need. Another question to ask, is whether your monthly maintenance fee will increase if vacancies go down.
Ask to see capital repair and replacement schedule
To answer all those questions, ask to see the building’s capital repair and replacement schedule. This will give you an idea of when the roof will need to be replaced and whether enough money is being set aside to do so. When office condominium organizations do not set aside sufficient funds for these capital items, they end up having to charge one-time assessments. This unexpected expense can unduly burden your business, so do your homework.
Office condominiums are clearly not the right choice for everyone, but it can be a smart investment for some. It comes down to doing your due diligence, understanding all the expenses involved and analyzing the potential benefits of buying..
If you are an investor or developer interested in purchasing property, consider working with our commercial experts at Landmark Title. It you have questions regarding a title on a specific property, contact Vicki Etherton or Marie Volm at (602) 748-2800.