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Condominiums for commercial use — office, warehouse/flex and retail — are much like residential condominiums. Typically, they are not as large as free-standing buildings, but they convey virtually the same real estate title and use rights.

The commercial-condo concept has become a viable alternative for small to mid-size firms that would have traditionally leased their spaces. And it provides you with another commercial funding opportunity.

Historically, many commercial landlords were reluctant to carve up larger vacant facilities to meet the space needs of the smallest users even when vacancies were high, choosing to wait for larger users to sign leases. This helps explain the rise of executive-suites created to serve this niche.

But this doesn’t help an expanding group of business-owners who want to purchase their commercial real estate. Developers, however, are meeting this demand. In the past two years, they have created commercial condos in pockets throughout the country.

Benefits include the fact that business-owners
can:
■ Build equity;
■ Stabilize, if not reduce, one of their largest business expenses (real estate);
■ Experience long-term property appreciation;
■ Benefit from the tax advantages of property-ownership; and
■ In some cases, reduce daily commutes (because many commercial condos often are located near residential neighborhoods).

Further, commercial-condo ownership allows business-owners to renovate their space, designing
their interior build-out for better use. In fact, it is increasingly rare for developers to offer finished units for sale. Many lenders include the interior build-out as part of a short-term construction
loan before terming out their loan into a permanent loan. Some bankers may want the buyers to pay cash for these interior build-outs, but that is often unnecessary and could lower the cash-on-cash returns.

It can be advantageous for business-owners to establish a real estate holding company — also called an eligible passive concern — to take title to their new property with a long-term, master lease between their operating company and that holding company. In this way, the owners can dispose of the operating company or transition it to another generation, while continuing to hold their real estate and maintain the long-term value and income potential. Two different operating companies can also pool their space needs and investments to own a commercial condo through this EPC model.

Many business condos can be purchased with financing that covers as much as 90 percent of the total project cost, thereby providing owners with greater cash-on-cash returns and leaving valuable capital in their businesses. Frequently, commercial condos are financed with loans providing fully amortizing terms for 25 or more years with fixed rates.

Markets with rapid population and business growth and with growing service sectors appear to be the best-suited for commercial condos.

Because they are positioned to meet the needs of smaller users, commercial condos are another real estate product to offer your business-owner clients. With increasing demand for the long-term financial benefits that condo ownership provides, the outlook for commercial condominiums is positive. Indeed, they likely should no longer be viewed as a trend but rather as a mainstream product that is here to stay.

Christopher Hurn is president of Mercantile Commercial Capital, the nation’s leading 90-percent loan-to cost commercial loan provider. The National Association of Development Companies named him 2006 Small Business Association 504 Banker of the Year. Coleman Publishing also named him marketing guru of the year, and he is the SBA’s Financial Services Champion of the Year for Florida and the 12-state Southeast region. Visit www.504Experts. com or call (866) 622-4504.