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Office condos allow ownership without maximum development

by Andrew Tellijohn   Dave Wagner operated his podiatric laboratory in two suites of an office building in White Bear Lake for most of the two decades he had been in business. But when his lease expired and a larger tenant wanted to expand, Wagner’s landlord politely told him he might want to find a new office.

Wagner, owner of Hugo-based North Star Podiatric Laboratories Inc., considered many options, including another traditional lease or even building his own office.

But in order to make the latter pay off, he says he learned you almost have to build a 20,000-square-foot edifice — something that doesn’t make much sense for a small business.

Then he learned about the growing trend toward office condominiums. “We weren’t really ready at the time to buy, but the opportunity came up,” he says. “You can purchase a smaller chunk of the building. It really made some sense for us to go that route.”

Wagner bought a 3,600-square-foot office condo in Hugo, which was actually 25 percent less space than his company previously occupied. But he designed what started as the shell of an office by himself, built a loft that provides additional storage space, and now has the flexibility he needs to nearly double his sales by adding a second shift without moving to a larger space.

“We were able to do the complete build-out,” he says. “We were able to design it the way we wanted it. We are full in here right now but we could easily double the volume coming in here and still make it work easy.”

And the largest benefit? Wagner says the monthly cost is about the same and he is paying himself rather than a landlord. So when he chooses to retire, he’ll not only have a business to sell, but a building as well.

Wagner is one of a growing number of Twin Cities area small-business owners taking advantage of low interest rates to buy, design and build equity in buildings of their own rather than paying a landlord for the privilege of occupying space.

How it works
Developers build condominiums of varying size and scope. Once they sell a certain percentage of the space, they turn building management over to an association that handles snow removal, exterior upkeep and other maintenance for a fee.

While real estate officials don’t have exact numbers on how many office condominiums are out there, they know that many developers have been building them the past five to 10 years.

Edina-based The Cornerstone Group has built Marketplace Lofts in Hopkins, Kensington Park in Richfield, and The Mist along Lake Minnetonka in Spring Park.

And Minnetonka-based Carlson Real Estate has several as well, including the New Town Center Office Plaza in Plymouth. Prices at that project start at $280,000 for 1,560 square feet, according to a company newsletter.

The trend is moving to the Warehouse District in downtown Minneapolis, where United Properties and Minneapolis-based Tria Development Partners are collaborating on First Avenue Lofts, the first all-office condo in that neighborhood.

The American Association of Retired People (AARP) recently purchased a four-story condo for its new offices in Washington, D.C. If that can work, they can work anywhere, says Jim Montez, a senior associate in United Properties’ Minneapolis office.

Demand to see the project has been heavy and the project is about one-third sold.  Montez says his clients figure: “I’m paying all this rent, I might as well pay it to myself. I’ll also have this piece of real estate that will be worth something.”

Wealth-building tool
Montez, who expects to do more of these projects in the future, recommends that small businesses assemble a team of advisers that includes an accountant, a lawyer, a real estate representative and others who can give advice on whether purchasing an office condo makes sense.

“Understand the implications, both positive and negative, to their business and personal wealth,” he says. “It’s really a personal wealth-building tool.”

That’s what Slade Helde did when his residential appraisal company outgrew his home office. He looked into leasing traditional office space. But in the end, he ended up choosing to purchase an office condo.

It’s located just four miles from his house in Apple Valley. The cost to buy turned out to be about the same as a monthly lease would have been, and, somewhere down the line, he’ll have an asset to sell along with his business if he so chooses.

“The appeal of ownership was better than what we were looking at for rental,” says Helde, owner of Apple Valley-based Infomarketing Inc. “I think it’s going to be an overall good investment. For small businesses this is going to be the wave of how businesses are going to be run.”

Plus, he got to custom-build the 1,536-square-foot space the way he wanted it. The space has a small reception area, a unisex bathroom, a kitchenette, a fireplace, two private offices and a large open area that can accommodate cubicles if the company expands and hires more people.

“When customers come in here, they say, ‘Hey, this is nice,’ ” Helde says.  Similar digs would qualify as “Class A office space, which you would pay a premium for.”

Infomarketing has nine employees and does about $750,000 in annual revenue. While Helde anticipates some growth, he says the flexible space leaves him with little risk. “I think we’re comfortable,” he says. “I don’t think we’re going to outgrow our space anytime soon.”

Not for everybody
While Helde is comfortable with his space, he acknowledges that office condominiums aren’t for everybody. It’s a new enough product that there also are some questions about what the resale market will be for office condos. Also, city regulations limit Helde from putting large signs out to advertise his business. That doesn’t bother him so much, but it might make a difference to certain businesses, he says.

And while his condo is located at the intersection of County Road 42 and Pilot Knob Road in Apple Valley, there isn’t a lot of visibility or traffic from a thoroughfare, he says.

Finally, the largest risk stems from small businesses that outgrow an office condo through fast expansion. That’s one of the main considerations business owners should take into account when deciding if this type of investment makes sense, says Kurt Manley, president of Eagan-based Manley Cos.

But there are benefits as well, not the least of which is pricing. Manley says office condos are selling for between $8 and $10 per square foot, whereas traditional office space is leasing at between $12 and $14.

For those that can swing it — smaller companies, such as law firms, chiropractors or small real estate outfits that need fewer than 10,000 square feet and don’t expect to grow much more — office condos have been extremely popular of late.

“The main thing people like about these is they control what goes on as opposed to having a landlord control what goes on,” Manley says. “How they maintain their building is up to them.”

For those small-business owners that don’t expect to outgrow their new space, lenders are finding the office condo trend one worthy of investment, says John Thwing, vice president of SBA lending for Wells Fargo Minnesota. When a potential buyer approaches Thwing, he’ll prequalify the company for a loan, then discuss with them issues such as cash flow, occupancy needs and the costs and benefits of leasing versus owning.

More often than not, Thwing says, if small-business owners can project relatively stable space needs into the future, owning an office condo isn’t a bad deal. “The key is the differential between ownership and leasing,” he says. “It’s not just the rate environment itself.”

Resale value uncertain
In recent times, interest rates have been low, so buying made sense and the office condo market took off. How hot they remain will depend on how stable those rates stay and how brokers deal with high office vacancy rates in the near future.

While real estate is generally a stable investment, the questions about the viability of someday reselling office condos are legitimate, at this point. “The key issue is to make this decision based on the viability of the condo as a good home for your business,” Thwing says. “In other words, don’t think of it first as a real estate investment and second as a home for your business.

It’s also important to realize it is a long-term investment. If an owner buys a condo and it serves the business well for 20 years, “it has paid for itself times over,” Thwing says.

That’s the theory espoused by Jason Messner, owner of Burnsville-based Patchin Messner & Dodd, a real estate appraisal company.

With the oversupply of office space available throughout the Twin Cities today, rent is relatively cheap and leasing might even be simpler than owning, says Messner, who moved his seven-person firm into the Sunset Ponds office condo in Burnsville last year.

While he is still awaiting his tax statements to determine how the cash outflows of owning versus leasing play out, Messner says he still has no regrets about buying his condo. The association he pays dues to for such items as snow shoveling and lawn mowing has been doing what it is supposed to do. And looking at his business from a long-term perspective, he says he’s convinced he made the right decision.

He compared it to buying a bond as opposed to a technology stock. “On a short-term basis, the easy decision is rent,” he says. “In the long run, if nothing else, I’m going to pay off the debt. Even if it doesn’t increase at all, you build equity. In the long run, 15 years from now, it’s still better than simply paying rent.”

Besides, “There is something to be said about owning your own place.”

Messner advises those considering an office condo to shop around and talk to multiple brokers. While the product looks the same, certain developers offer different options that could lead to a better deal.

“You’ve got to look at these as more of a long-term play,” he says.

[contact] Slade Helde, Infomarketing Inc.: 952.435.2156, sh****@***oo.com; www.infomarketingservices.com. Kurt Manley, Manley Land Development Inc.: 651.209.7731; ku********@************rs.com; www.manleybrothers.com. Jason Messner, Patchin Messner & Dodd: 952.895.1205; www.pmdadvisors.com. Jim Montez, United Properties: 612.305.2107; jm*****@*********es.com; www.uproperties.com. John Thwing, Wells Fargo SBA Lending: 612.316.2501; sb****@********go.com; www.wellsfargo.com,  Dave Wagner, North Star Podiatric Laboratories Inc.: 651.426.9388; da**@**********ab.com; www.northstarlab.com