Quarterly: Spring 2004 - GWCAR - Greater Washington Commercial Association of REALTORS

CBQ >> Spring 2004 Issue

Office Condos Offer Options For Small Firms

by Eugene Kenney, Vice President, Akridge

Tenants are becoming owners, thanks in large part to the availability of blocks of space that previously were only available to renters. Just as the boom in condominium housing totally transformed ownership patterns for residential real estate in the city over the past quarter century, office space is heading in this same direction.

Until recently, DC couldn't compete effectively for organizations that wanted to own 12,000 to 70,000 sf because smaller ownership was concentrated in Dupont or Capitol Hill townhouses from 4,000 to 10,000 sf. Land costs made development of projects that did not take full advantage of their floor area ratio potential prohibitively expensive.

Now, however, there are at least a half dozen buildings that are for sale as office condominium regimes with the typical unit being one or two floors of a building with floor plates running from 5,000 to 10,000 sf.

The core reasons for ownership of office space are simple-identity and money, and not necessarily in that order. For non-profit 501 (c)(3) organizations, the availability of 4% tax-exempt bond financing for their mortgage with no money down makes compelling economic sense.

As a comparison example, take a 10,000 sf tenant leasing space in a B building at $36.50 per square foot. The tenant's savings over 10 years would be close to $450,000 if they were to purchase space in a new office condominium at a price of $440.00 per square foot. However, if one takes into account the equity build up of paying down the mortgage coupled with a modest 3% annual increase in value, the non-profit organization that sells its office space after 10 years would see a whopping $2.5 million savings as an owner instead of renter.

Owning office space also makes sense for the many closely held personal services/consulting/lobbying firms so prevalent in DC. Although their interest rate might be closer to 6.5% and a down payment would be required, the entrepreneurial business owner who purchased his or her office space could see about a $2.2 million savings in office costs with a sale of the property after a 10 year occupancy.

Condominiums-They're not just for retirees, surf or snow bunnies, or hip urban dwellers any more. They make good business sense for most organizations that are relatively stable in size. How else can a 10,000 to 50,000 sf non-profit organization own Class A office space in a Class A downtown location for less than Class B rental rates? Think about it.