Office condos have given the phrase "working from home" an
entirely new meaning.
With interest rates historically low, small-business owners are discovering
that mortgage payments for an office condominium can rival or even beat what
they pay to lease office space in a larger building. Professional service
providers such as dentists, accountants and architects, in particular, are
investing in this niche market.
"The little guy finally has an option," says Rick Lindley, project
manager with Austin-based Land/Creek Development.
With office condominiums, owners often get a higher-class space with more
amenities, to boot. And there are tax benefits too. Property owners can deduct
mortgage interest and the depreciation of the condominium, while tenants can
write off lease payments only.
Chuck Space, owner of Austin-based association management firm Space and
Associates, launched his business in 1983. Space says that several times in the
past 20-plus years when his office lease renewal came up, he considered buying
an office condo.
"When you see how many dollars you've spent, you start to think about
how you can build equity for yourself and not someone else," Space says.
In 2000 his company took the leap and purchased a 1,500-square-foot condo on
Spicewood Springs Road, between Mesa Drive and Loop 360. The office space was a
shell, giving Space the opportunity to choose every detail, from the carpet to
the office décor. While most tenants are awarded comparable freedoms, Space
says it is easier to take pride in the finish out process, knowing it benefits
your company in the long run. Space adds that the autonomy of condo ownership
parallels the feeling you get from running your own business.
Lindley says owners tend to find the finishing touches to the interiors and
exteriors of their offices more gratifying than any finish outs allotted to
leasing tenants. Improvements that tenants make to their spaces are left behind
when they eventually move out. Space says that as with residential condo associations,
he pays dues that cover maintenance and any needed improvements. However, on
their own, his company has added some landscaping, simply because they wanted
to make the upgrade.
According to Lindley, buyers of office condos typically are seeking 2,000 to
3,000 square feet. Their company staff and space needs are stable, and they
often have been in business -- and paying rent -- for five to 10 years. They
are ready for more control and less risk over what they pay month to month for
office space, Lindley says.
According to Steve Scheffe, owner of Austin-based commercial developers The
Scheffe Group, the price range for office condos is $120 per square foot for a
15- to 20-year-old resale unit that is not in a prime location. The higher end
is $230 per square foot for new offices that are in higher-profile locations.
These spaces usually are geared toward medical professionals.
Russ Krengel, vice president of the Austin branch of CNL Financial Group
Inc., says the majority of the current 20 percent office space vacancy rate is
for larger buildings, not for units less than 10,000 square feet.
"It's better than leasing when all you have to show for it is check
stubs," Krengel says. "And so many of the condos are new, so you
basically get the key and you're ready to go."
Krengel, who focuses almost exclusively on owner-occupied real estate in
Austin, San Antonio and the Rio Grande Valley, says he has seen a rise in the
number of loans for this niche. In 2002 he brokered 25 loans; in 2003 it was
32. This quarter alone, he has closed on nine.
According to Krengel, one hurdle stopping many small businesses is the down
payment. Most institutions will loan the money with a 10 percent down payment,
he says. However, with some spaces selling for $500,000 that is still a large
pill for many small businesses to swallow.
But if they can afford the down payment, office condo owners can get
creative about lowering their monthly notes. Krengel says some businesses that
can afford it, will buy a space slightly larger than what is needed and then
lease out the extra offices. This approach also allows the owner some breathing
room for future expansions.
Krengel says some professionals see office condo ownership as a lucrative
retirement investment, as they can lease or sell the office once the mortgage
is paid.
For example, a dentist may sell his or her practice upon retirement, and the
new owner may want to keep the location for the sake of business stability. If
the retiring dentist only leased the space, he or she could not guarantee the
space would be available indefinitely and the retiree would have no control
over what rental rate the landlord would offer the incoming dentist. But if he
or she owns the space, the practice is a higher-dollar asset because the owner
then can offer a set price for the space -- either through it being part of the
sale or by offering a more-stable lease.
Of course, there are some drawbacks.
It boils down to flexibility. If a business grows or shrinks and requires
space changes, a landlord may have the means to accommodate a tenant. However,
owners generally are stuck with an existing space unless their neighbors move
and free up adjacent space -- and that's assuming the nearby space is
desirable.
Another downside is location. Proprietors seeking centrally located office
condos might be hard-pressed to find such properties downtown, as most existing
office condos are located in outlying neighborhoods. Traditionally,
professionals who work out of office condos like to be near the clients they
hope to serve; they also like to be close to their own homes.
"If we can find a condo near their home, we tend to be more successful
in selling it," Scheffe says.
In addition to existing properties, new construction is under way and
swiftly moving into the hands of new owners.
One of the developments recently completed by The Scheffe Group, Parkstone
Office Condominiums, located at 1800 S. Capital of Texas Highway, was 25
percent sold before construction was completed in November. Another
development, Oak Wood Commons, located at William Cannon Drive and Escarpment
Boulevard, will be completed at the end of the year and will be geared toward
the medical community.
ANNE DEMARSH is a freelance writer in Austin.