Condominiums Built For Business Owners

August 30, 2017

Like apartment dwellers who are finding that it is less expensive to buy than to rent, business and professional firms are moving toward buying offices rather than leasing. While buying or constructing an entire building is an option for major corporations or for smaller firms outside metropolitan areas, owning commercial space generally means being part of a condominium structure.

Condo Office Buildings

Small office buildings are the most common type of commercial condominiums. The strongest demand for this type of space is from lawyers, doctors, advertising firms and other professional and service companies, as well as small private corporations. These firms often accumulate capital not needed in their business, and their occupancy of a particular location can have value to them in the form of goodwill so that they are interested in controlling the space.

From a financial point of view, the basic appeal of commercial condos space is that over the long run, owning can be considerably less expensive than leasing. While rents may be low in the current market, renewals over the years are likely to mean rent increases. By comparison, mortgage financing is now available at relatively low fixed interest rates for terms of ten years or more. In addition, well-located and well-maintained space can appreciate significantly over the period of ownership.

Tax considerations are less favorable for owners as compared to tenants. A tenant can deduct 100 percent of rent payments as a business expense. A condominium owner can deduct only the interest on a mortgage loan, as well as depreciation (using a 39-year life). While the tax benefit of leasing may be slightly better than those from owning, the likelihood of appreciation of value should more than offset the difference.

A further advantage of condo ownership is that it eliminates undesirable provisions that may be in a lease. For example, a landlord may have the right to relocate the tenant if a major tenant requires more space. Using an office at night or on weekends may require the tenant to pay for utilities and services. In general, small tenants have little negotiating power when negotiating a commercial lease.

Management Concerns

Like a residential property, a commercial condominium is managed by a board of directors made up of unit owners. Certain matters may require approval of a majority of owners, thus assuring each owner a say in any decisions affecting the building. Often the condominium charter gives the board a right of first refusal when a unit is offered for sale. In this way, control over the type of building occupants can be maintained. This arrangement frequently prevails when all occupants of the building are in the same or a related business or profession.

Changing Needs In Space

A frequent concern of small business or professional owners is that space requirements may change at some time in the future. In a rental building, where turnover is likely to exceed that in a condominium, a tenant is more likely to be able to adjust its space requirements. In the case of a condominium, an owner anticipating a future need for more space can buy a larger space initially and lease it short-term until required (assuming leasing is permitted). However, it may be more difficult to obtain additional space if needed.

Cooperative Office Buildings

Cooperative office buildings became feasible only after a 1986 tax law permitted business corporations to qualify as "tenant-stockholders" eligible to deduct taxes and interest payments. However, there appear to be relatively few office co-ops.

One major difference between a cooperative and a condominium is that a co-op board of directors has the right to disapprove a proposed buyer, whereas a condo board only has a right of first refusal. Thus, cooperative ownership gives greater assurance that tenants will occupy a building in a similar business or in related lines of business, if that is the intention of the owners.