Are commercial condominiums good investments?
March 17, 2014
I am often asked, "Which is the better investment — a freestanding building or a commercial condominium within a larger complex?" Each has its own unique set of attributes, and so the answer really depends on the needs, goals and characteristics of the buyer.
I provide below a comparison of each building type based on certain property characteristics, which hopefully will shed some light on the right property profile for your situation.
A freestanding building is owned by a single entity (be it a person, couple, corporation, etc.) and it sits on an individual parcel with separate legal access. The most common freestanding buildings are single-family residential homes. A commercial condominium (or condo) is an individually owned unit that is part of a larger multi-unit building with various owners. Each condo owner receives fee simple title to their unit along with a recordable deed. A condo owner also receives an undivided interest in the common areas of the project, including the hallways, parking areas, landscaped grounds, etc. Each condo is assigned its own assessor parcel number ("APN"), allowing property taxes for the entire complex to be assessed individually to each unit based on that unit's particular value. Condos can be bought and sold in a manner similar to that of freestanding buildings.
A freestanding building is generally managed either by the owner or by a fee-based professional property manager whom the owner must hire and compensate. A condo complex is typically managed by a condominium association comprised of a small proportion of the condo owners chosen to represent the entire project. This "owner's association" (OA) may also choose to contract with a professional manager. Investors or owner/occupants who want nothing to do with managing or keeping up their property may want to seriously consider condo ownership, as these tasks can be completely handled by others.
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Property Operating Expenses
Many investors balk at purchasing a condo when they hear that, in addition to their mortgage payment, they will have to pay monthly Owner Association dues (commonly known as "homeowner dues" in residential projects). However, OA dues are simply a compilation of certain property operating expenses, such as landscaping, maintenance, fire insurance and utility expenses that would be equally present (just not aggregated) in the ownership of a freestanding building. Although OA dues of, say, $250/month for a 1,500-square-foot office condo may seem expensive, this amount could very easily be less than the cost for the same expenses in a comparable freestanding office building due to "economies of scale," from which a large condo complex can benefit. Before discounting a condo based on OA dues, an "apples to apples" comparison of operating expenses should be completed.
Due to the cooperative nature of condo projects, decisions regarding maintenance, capital improvements and other financial actions are necessarily relinquished to a representative OA body. Independent folks who prefer to captain their own ship may not be well suited for condo ownership. On the other hand, a well-run OA will budget for necessary expenses and reserves and will keep the property well maintained and running smoothly, thereby maximizing each individual unit's value. A discerning walk around the condo project and a few conversations with existing owners are highly recommended prior to purchasing a condo, as this will give you a very good sense of whether the OA is functioning properly.
Cost and Appreciation
Because of lower per-unit construction costs and shared common areas, condos are generally less expensive than freestanding buildings. By example, a 3,000-square-foot industrial condo would generally cost less than a 3,000-square- foot freestanding industrial building in comparable condition. Therefore, if funds are tight, condos may provide an easier path to ownership. Will they appreciate as much as freestanding buildings? This is a very difficult question as the answer is project specific and depends on numerous factors, including how the project is run and maintained. In observing commercial condo prices over the last 15 years, they generally tend to mirror the movements of their freestanding counterparts and will typically appreciate (and depreciate) in a similar fashion.
Lock Richards specializes in the leasing and sale of commercial/investment properties and has over 25 years of experience in the field, including over 15 years in the Grass Valley/Nevada City area. His "Commercial Property Review" newsletter, full of current Nevada County market trends and specific property details, is available at http://www.svnhighland.com or by calling 530-470-1740.
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