Office Condo Investment

[Chris Garzino]

Hi BP Community,

I would like to begin investing in commercial real estate.  I have come across office condos which have a lower entry point when compared to full buildings.  Does anyone have experience investing in office condos they would share?  Can you provide the pros and cons and what one should look for when reviewing?

Thanks,

Chris

[Brett Buchwald]

Chris,

Unless its a high cap rate deal, with a great tenant in a great location, and you plan on holding for a very long period of time, I would avoid office condos. I'm a commercial agent in Atlanta and I just sold some office condos. It was quite a challenge and I would probably avoid office condo listings again in the future; they had been on the market for nearly 2 years before I got the listing. With this particular deal I was selling entire buildings, not just individual units, but they were within a condominium and still subject to association fees. They also had a NNN lease in place, meaning tenant pays for all costs associated with operating the building (including the association fees in this case). It was a great tenant, in a great location, and good cap rate, yet investors still scoffed at the idea of owning office condos. The reason is that you never truly have complete control over your real estate; you might have to pay for a portion of parking lot that doesn't serve your unit; there could be costly assessments that you're obligated to pay; maybe the roof of an adjacent unit has a leak and you get hit with higher fees to cover the repair; if you want to knock it down and build a new development, you probably won't be able to.

At the end of the day, I believe that people buy real estate for 2 reasons, one being more important than the other: cash flow and future pay off from a sale of the asset. Cash flow is great, but why purchase an asset if you can't sell it?? 

For these reasons, I would avoid buying office condos as an investment.