United States: Commercial Condos: A Concept Worth Considering

There’s a trend in commercial real estate that represents another option for developers who are interested in developing commercial property: commercial condominiums.

It’s a real estate concept that’s relatively new to the Portland market. Yet it’s very common in other parts of the country—Atlanta, Phoenix and San Diego for instance—and it’s increasingly popular on its merits. It can replace the model wherein developers lease office or warehouse space to small businesses. Instead, developers sell small sections of their commercial properties to small businesses that desire to own rather than rent or lease.

There are local examples of this approach right now. The mixed-use Pearl District has commercial condos. So do outskirt submarkets such as Tualatin, Hillsboro and Wilsonville, where industrial sites dominate. It's also been used in rural areas throughout Oregon.

This approach potentially represents a mutually beneficial scenario, but only if the circumstances are right. Developers launching major projects and entrepreneurs with aspirations for brick-and-mortar would do well, therefore, to consider the commercial condo. Wisdom dictates that both parties should be as informed as possible regarding all the real estate options.

A commercial property owner here in Oregon envisioned a business subdivision. But local zoning regulators required expensive public streets and other improvements for a sub-division project. But as a commercial condo project, he got to build private streets, which cost less.

Who’s buying such commercial condos? Plumbers. Architects. Dentists. Non-profits. Title companies. In other words, entrepreneurs and professionals who recognize the advantages of real property ownership, and who are otherwise well suited to this approach.

Each owner owns his or her won unit. An association of the owners is created to repair and maintain the parking lot, the outside of the building, the roof and so on. The association also collects assessments that are held in reserve for repair and maintenance projects. The arrangement can work out well for all parties involved.

Perhaps the most intriguing thing from the developer’s point of view is that besides the possibility of significant regulatory advantages, commercial condos can be the quickest path to profitability. A developer can, for purposes of demonstration, buy a property for $47 per square foot in March and then sell pieces of it in November to condo buyers for $70 per square foot. That’s a considerable gain on a tight schedule.

Depending on the rules that apply to the specific location, developers can potentially face fewer and less stringent regulations. Additionally, fewer filings may be required.

Regarding properties with historical status, the commercial condo route can be a wise alternative to the costly prospect of financing the total rehabilitation the structure. Rather, little pieces of history can be sold to willing condo buyers who then finance some of those desirable improvements.

When a small business invests in owning a commercial condo, that business typically owns the air, walls, ceilings and floors of its condo unit plus an ownership interest in the common areas. The outer edge of this space is usually a point of negotiation. Often it’s defined by the inside wall of the condominium unit. In the case of what’s known as a shoebox condo, the small business owns an area that typically extends two feet beyond the walls, two feet above the peak of the roof, and two feet under the footings. Whatever the physical dimensions, though, the truest measure of the commercial condo concept is whether the small business in question actually warrants it.

Here are five critical questions: (1) Are the space requirements of the owner fixed and stable? (2) Is the business able to shrink and grow with the economy without the need for major staffing changes? (3) Is there a willingness to take on greater financial risk (debt carried on the books) as compared to renting? (4) Are the upfront costs of ownership affordable? (5) Is there an expectation that real estate values will increase over time?

For business owners who answer these key questions in the affirmative, a commercial condominium will have many benefits. It’s a way to invest in one’s self…with a value-added asset that can help fund retirement. It’s how to enjoy the prestige of owning brick-and-mortar without having to buy or construct an entire building. Of course, there are potential tax advantages in terms of mortgage interest, depreciation, insurance and maintenance.

Due diligence is necessary when considering the purchase of a commercial condo. One should keep in mind that condo ownership is arguably less flexible than leasing, because reselling that condo can be problematic if market conditions deteriorate.

A final thought on the biggest misconception surrounding commercial condos: They’re no longer limited to high-rises. Any sort of structure will suffice. So the ultimate issue is, does this approach make sense for specific properties and small businesses owners?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.