COMMERCIAL CONDOS 101: A Quick Study Guide for Property Owners/Developers
The phrase "condo conversion" has been around for decades, but until recently it only applied to apartment buildings. In the business-to-business world, converting office, industrial and retail space into condominium units could be the key to surviving in today's challenging economy. Following is a simple list of frequently-asked questions that will give you a quick and thorough education about converting commercial properties to condominiums.
Why should I consider converting my industrial, office or retail building to a commercial condo?
If you own one of these properties, parsing it out into smaller sections that can be sold as commercial condos could be the most efficient way to stimulate your cash flow, lower your tax liability and reduce maintenance costs. By converting your non-residential commercial building to condos, you become, in essence, a real estate developer, and as a developer, you're turning your building into a productive asset. Whether the property is owned by a bank or a private owner, condo conversion could maximize its value, offer tax advantages and provide relief for properties facing foreclosure or a longer hold period than you care to have.
How much will it cost to convert?
Most of your investment will be in legal and professional fees. In most cases there is no retrofitting or construction required. Many owners who are converting get help with costs by bringing in a bank or investment group as a joint venture partner.
I don't own a commercial property, but I might consider buying one to covert as an investment. How do I find the best properties for a project like this?
Many cities are full of mixed-use Grade B and C retail centers that can be cleaned up and converted. You could keep some of the retail component, add some professional tenants and convert some of the space to condos. As an owner/user, with rental properties and depreciation it's possible to greatly reduce your potential tax liability. We strongly suggest that you first find a trusted commercial real estate broker who can bring in a team of experts (accountants, lawyers, architects, as needed) to work with you.
I represent a bank that wants to dispose of foreclosed commercial buildings. Is conversion a viable option?
A bank has a better chance of selling individual units than an entire building in the current economy. Many business owners are becoming aware of the value of owning their own office, retail or industrial spaces, and the demand gets higher as this awareness spreads. But they don't want to buy an entire building; they may need only 800 square feet. With very few commercial buildings available in that size range, the demand for commercial condos is underserved. By converting your building into spaces of varying sizes, you will have something to offer to a very eager market. To make the conversion process more efficient and to lessen upfront costs, you can joint venture with a developer who has expertise in converting and selling and can act as a project manager. This project manager can work alongside your current broker or make recommendations as to which brokerage firm to work with.
My commercial building has been on the market for a long time and I can't seem to sell it. How will conversion help me?
If your property isn't selling, or if the property is facing foreclosure, conversion can definitely help. There is a much higher demand for the purchase of smaller commercial spaces than there is for large buildings (see the previous answer, above), so smaller spaces will be easier to sell. Conversion can also help by relieving your responsibility for the maintenance of common areas, so your risk for upkeep is lowered considerably. And with owners paying property tax on their individual units, the tax burden for the property is shared.
How do buyers fund the purchase of a commercial space?
While commercial banks may be hesitant to make these loans, there are Small Business Administration (SBA) programs that make capital available for established business owners who want to buy commercial space. And sometimes these loans will finance up to 90% at very favorable rates. Usually these loans have a maximum loan amount of $2,000,000, so property owners who convert higher-valued properties should segment those properties to fit the SBA loan criteria.
How complicated is the process of converting a property?
It is a simple five-step process, but there can be some red tape involved, so we advise that you bring in a professional real estate broker who has experience with commercial condos to guide you through the process. Basically, these are the steps to conversion:
1. Check with your city's Planning Department to make sure zoning will allow conversion of commercial (non-residential) properties. You may or may not need a permit, depending on your city or county. You're simply "re-classing" the ownership of the property.
2. Hire an engineering firm to survey the property and create a map. They'll basically be drawing property lines around the newly designated units and defining the common spaces (parking, outdoor areas, lobby, walkways, etc). Even if you don't convert right away, having this map in place can increase the property's value if you decide to sell the approved conversion rather than complete the project yourself.
3. Your attorney will put together a set of HOA bylaws, rules and regulations, along with a declaration document stating that the property is now a condo. You will also need to establish a board of directors, which is usually made up of the property owners.
4. These documents, along with the map, are then submitted to the county assessor's office, where each unit will be assigned its own tax parcel I.D. The local jurisdictions are usually happy to approve conversions, because the property taxes paid on a group of individual condos is usually higher than the taxes paid on the building as a whole.
5. The conversion process takes anywhere from 4 -8 months, and during this time you can pre-sell the units by advertising them as a conversion in progress.