Let's Go Condo
In six years, revenues for Orchard Medical Consulting, which manages workers' compensation cases, have risen from $136,000 to $3 million. The staff has grown from one person to 40. This year, founder Robin Orchard hopes to add 20 people and expand her offices to Las Vegas, Salt Lake City, and Tucson. But no matter how big her company gets, Orchard says she won't need more office space because most of her employees telecommute. So why keep renting? Last year, Orchard bought a $1.8 million office condominium in downtown Phoenix.
In doing so, Orchard bucked conventional real estate wisdom, which posits that businesses on the upswing should stay flexible by leasing office space. But more entrepreneurs, particularly those who don't expect to need more space, are instead buying office condos. The condos' popularity varies greatly by geography. Says Matt Carolan, a senior vice-president at real estate consultants Jones Lang LaSalle: "Phoenix is on fire for condos right now. In Atlanta, probably 10% of the office market is condos. But in Chicago, it's a really new concept and it hasn't taken off."
Most office condos—typically 3,000 to 10,000 square feet—are in large, one-story properties that are easy to divide or in small office buildings in suburbs or on the outskirts of cities. But developers in urban markets have been getting into the act in cities with reasonable land and construction costs and high growth, such as Phoenix, Atlanta, and Las Vegas. Condos are harder to find in dense, expensive markets, notably Manhattan and Boston, where developers can make more charging rent than they would on sales.
THE HEAT'S OFF
If you buy, you won't have to worry about a relocation clause in your lease. You'll be in better control of your occupancy costs, although you will have to pay association fees. And the heat? You can turn it on or off whenever you please. Then there's the equity you're building. Orchard, for example, would be spending $10,000 a month to rent a 5,600-square-foot office. Now she pays about $12,000 a month in mortgage payments for a similar space, but will profit if condo prices rise.
The tax benefits can be sweet as well. Many buyers purchase through a limited liability corporation and then rent the space to their own business or another, says Joel Griffin, CEO of the Atlanta-based condo developer The Griffin Co. If you lease to your own company, the company can write off the lease, and you, as the owner, can write off the depreciation of the property. Some condo owners are even taking steps to slash their personal income and charge their own companies above-market rents, then draw their paychecks from the rent rolls, which are taxed at lower rates than personal salaries, says Michael Crystal, an associate with real estate services company cb Richard Ellis. When an entrepreneur retires, he or she "can sell the business to a junior partner or investor and continue leasing the property to the business. The rent becomes a pension," says Griffin.
Of course, there are downsides. If your company hits hard times, the space and financial obligation can quickly become overwhelming. A seismic change for the better—a large new client, for example—may be equally tricky to accommodate. And there's no guarantee you'll make a profit when you sell. The office condo market is new and untested, and consultants say it's impossible to estimate the value of a second-generation condo.
Jim Mudd Sr., founder of advertising agency The Mudd Group, isn't worried. He recently spent $2.7 million on an 8,700-square-foot condo in downtown Chicago for his sales staff. "We take ownership as an opportunity to build equity and have a piece of the rock in Chicago," says Mudd, who runs his $130 million, 135-person company with his six children. "And we believe that value of the property will continue to go up in the long haul."
By Amy S. Choi