The commercial corner: The commercial condominium market: An expanding opportunity for brokersMike BoggianoCommercial condominiums The Mortgage Press is pleased to present "The Commercial Corner," a monthly column by Mike Boggiano of Silver Hill Financial LLC dedicated to answering your questions about the commercial mortgage marketplace. If you have a question that you would like answered in a future installment of "The Commercial Corner," please e-mail [email protected]. Countless businesses across the country have begun to discover the advantages of owning their own spaces in the growing commercial condominium market. Savvy entrepreneurs, retail businesses and professionals—from accountants, architects and attorneys to dentists, designers and doctors—are discovering the advantages of owning versus leasing. This month's column answers common questions about commercial condos—information you can use to capitalize on this growing niche. What are commercial condominiums? Commercial condos operate much the same way as residential condos, with each buyer purchasing an individual unit. Typically, the space is less than 10,000 square feet, which helps meet the growing need in many urban and suburban markets for office and retail space between 1,000 and 10,000 square feet. Some units, however, can range up to 50,000 square feet. All tenants have their own entrances and separately metered utilities. Usually, owners pay an association fee to cover lawn care and landscaping, outside building maintenance and trash pickup. Individual signage and parking are frequently available. What kinds of commercial condominiums are available? There are several kinds of commercial condo properties available in today's market: • Office. Especially attractive to service businesses, office condominiums offer desirable spaces for architects, dentists, doctors, lawyers and other professionals, often in a more suburban setting, close to their client bases. • Retail. From bicycle shops and gourmet food stores to art galleries and gardening boutiques, entrepreneurs and small retail businesses appreciate the advantages of owning instead of leasing. Frequently, these retail condos are located on the first floor of a larger building that includes residential condominiums or apartments on the upper floors. • Warehouse. Anyone who currently leases warehouse space will find the benefits of owning versus renting attractive. Often, warehouse condominium owners can purchase space for much less than they would pay to lease. In addition, warehouse condos are typically available in smaller sizes—less than 5,000 square feet—ideal for the small-business owner. • Hotel. When acquired for business purposes, a hotel condominium, also known as a "condotel," presents the opportunity for condo owners to earn rental income from travelers. Owners can use their condo whenever they like; but, when they are away, they can place their condo units in the hotel's rental program and receive a portion of the revenue. The hotel management takes care of renting, cleaning and maintaining the unit, while visitors enjoy all of the hotel's amenities. What advantages do commercial condos offer potential buyers? Commercial condos offer buyers numerous benefits and advantages over leasing. These include: • Flexibility. Condo ownership is typically more flexible, when compared to leasing. Signing a 10- or 20-year lease obligates a business owner to pay the rent and be responsible for the lease for a defined time period. A commercial condominium owner can occupy the space, lease it or sell it whenever he wants. • Fixed monthly expenses. Ownership offers built-in protection against rising rents in desirable locations, along with the security of regular, predictable monthly expenses. • Tax advantages. Property ownership offers significant tax advantages when compared to leasing. • Equity. Owners have the opportunity to build up equity in their properties. Where do I look for these kinds of business opportunities? For residential brokers who wish to get involved in the commercial condominium market, there are numerous ways to source this kind of business opportunity. Talk to developers who are building commercial condo space—from the large-scale, mixed-use metropolitan projects and hotels to smaller suburban professional buildings. Look for opportunities within your residential customer base—the previous client who may have outgrown his home office, the professional who is new to an area and may need office space close to home or the business owner whose lease is up. Get involved in your local chamber of commerce to connect with new business owners who may need office, retail or warehouse space. Browse through your local business journal or other business publications to find ads promoting commercial condo sales; the real estate agent or agency sponsoring the ad is likely a good contact for leads and referrals. What do I need to know about commercial lending to work with office, retail, warehouse or hotel condo buyers? Commercial condos are single units and often owner-occupied. Because the revenue for the condo is generated by a single owner/occupant and not necessarily from the property's cash flow, these properties may have difficulty passing debt service coverage ratio requirements (the traditional analysis method used by most commercial lenders). However, by working with the right lender—for example, one using a debt-to-income underwriting approach—you can help a strong borrower get financing rather easily. To find success in the commercial condo niche, first spend the time to find the right lender partner so that you can close deals easily and quickly. If you're new to commercial lending, commercial condominiums are a great opportunity to expand your mortgage lending business. Look for a commercial real estate lender with innovative program features—for example, flexible underwriting and high loan-to-value percentages—that facilitate an easier, faster process for you and your borrower. Mike Boggiano is senior vice president, national sales manager for Silver Hill Financial LLC. He may be reached by phone at (877) 676-1562 or e-mail [email protected].