How To Profit From The Office Condo Boom Now!

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Millionaire Now! by Larry Nusbaum

This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

How To Profit From The Office Condo Boom Now!

Posted on 12/21/2006 20:18 PM | Link | Post Comment

Here is my entire article (unedited) that will appear in next month's issue of PREIM:

"Right now, as you read this article, you have no doubt been concerned with the state of the housing market and the way the negative has been accentuated in the press. That’s what the media does. Let's move past that and ask, "can I still make money in real estate and if so, where and how?"

The Opportunity
The answer is yes and I will show you how to profit from one hottest sector of the real estate market right now. But, first, understand that real estate is comprised of 5 major sectors: Hotels, Apartments, Offices, Residential Housing and Shopping centers. Within housing there is existing homes (85%) and new home builds (15%). The new home builders have taken a pounding and that will not change soon. Within Shopping centers, you have included the smaller "neighborhood strip centers" and Retail. The office sector now includes "office condos".

What is an office condo and how does it compare to a residential condo that we are all so familiar with:
1. Office condos can share common walls and roof.
2. It is often one unit in a building of units.
3. The buyer/owner will buy as a place for his business or as an investment to rent out to another business.
4. The owner pays a monthly association fee to the Association for managing and maintaining common grounds. The amount of the monthly fee is known in advance.
5. The H.O.A. is responsible for all common areas and for maintaining building insurance.
6. The owner also gets deeded parking space(s).
7. The H.O.A. sets rules for such things as assessments, parking, lighting, signs, fixtures etc.
8. The H.O.A. can even exclude certain types of businesses from operating on the premises.

So far, not much different than a residential condo in it's structure. The difference, then, is in the timing. We are past the condo peak of this cycle for housing. But, we are only in the 3rd inning of a nine inning game for office condos. The two major reasons for this are because smart money has come out of residential and has found its way into the office market and because business owners no longer wish to rent but rather see that paying rent to one's self and making a good investment is an easy way to participate in the real estate boom.

When did the trend start to take hold?
Thanks to broker/developers like Shea Commercial, the demand started to be met in 2001 with several new trendy construction projects springing up principally along the 101 freeway in Scottsdale and in Pinnacle Peak area in North Scottsdale, Shea Blvd. and Scottsdale Rd. As land started to get developed, projects spread out to Hayden Rd., Desert Ridge and Glendale. Most are near main roads and freeways for easy access. Eventually, office existing buildings were refurbished and condo mapped in downtown areas of Scottsdale.

How to Participate
Buying, with the help of a skilled commercial Realtor®, one who knows the office condo market well will go a long way in helping you make a wise acquisition.

Which areas are hot: Scottsdale 101 Loop, West side (Glendale) and Desert Ridge, just to name a few.
Prices range from $170 -$300 per square foot. Check comparables in the area you wish to buy.
Who is buying (or renting)? Doctors, lawyers, dentists, lenders and other professionals.
You can negotiate price, space and parking even on new builds, so do.
Buy with small common area "loads". A load is the extra you pay for common areas such as a lobby or patio.
On a new build, you will get a grey shell. That simply means 4 walls, plumbing hookups and a concrete slab floor. Sometimes it means with HVAC and sometimes not.
Expect to pay another $20-$40 per foot to improve to "vanilla shell", complete with lighting, carpeting, walls, bathrooms etc. Vanilla shell is ready to rent. Word of advice: try not to complete the vanilla shell until you have a signed lease and the tenant has negotiated what they require.
Tenant Improvements run about $50-$65 per foot and are negotiable. Give as little as necessary.
Avoid projects with large loads (additional pro rata cost per foot of common areas) and buy after the project has come out of the ground. That indicates to the buyer that the bank has approved the builder and at least 40% has been pre-sold.

Financing Your Office Condo
Expect to put down 20-30% on your purchase. You can put down as little as 10% on an SBA 504A loan. The SBA only lends money to businesses that will occupy at least 51% of the space and can prove that they will create new jobs. An investor loan will be contingent on several factors by the bank: the strength of the personal guarantee (you), the market rent, the cash-flow, and the appetite for the project.

The numbers can look like this example for the office condo:
Purchase price: $300,000 (based on $185/Ft)
Down Payment 75,000 + $30,000 in vanilla shell = $105,000
Loan 225,000

Payment $1662/mo (based on 7.5%, 25 years amortization)

Rent collected: $2962/mo {based on $22 per foot vs. $1000-1200 for a residential condo}

How to Search
This is the easiest of all tasks. Simply log on to Loopnet.com and search by price, zip code or city or by county and by category (office)

The Major Developers and Brokers
Cavan Commercial, Brad Logan 480-860-6900
Shea Commercial, 480-451-9077
Shell Commercial, Randy Shell, 480-443-3992

Historical Price Movement
2004: $135-$150 per foot
2005: $160-$235 per foot
2006: $170-$300 per foot (with the high end in Scottsdale)

Expectations
The owner occupant has an asset with fixed costs and future upside.
The investor is looking for current positive income and capital appreciation.

Current Projects Available under $500,000 list (both new & existing)
Scottsdale: 18
Phoenix: 70
Mesa/Gilbert/Chandler:51
Glendale/Peoria: 3

READ ABOUT HARRY'S COMMERCIAL RE INVESTMENTS HERE and Office Condos here

"Want to own part of a big downtown office building? Buy an office condominium. They're the latest rage. They offer all the advantages (and disadvantages) of owning a building."

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