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If, like most of us, you’ve been hearing how everyone you know has seen the value of their home skyrocket recently, you may be wondering if owning your own office space might not be a good idea. For small business owners, buying office space instead of leasing offices in the traditional way can have benefits, but there are also potential drawbacks. The major drawback, say brokers, is that a business can’t expand or contract easily if it buys office space instead of renting. Say you buy office space on the ninth floor of a building and someone else buys it on the eighth and tenth floors and you need to expand. Then you’ve got a problem. On top of that, there are only a small number of individual offices for sale in Manhattan.
There are exceptions, however. One broker is selling office space in a new 20- story glass-and-concrete tower set to rise on West 25th Street in Manhattan. The building, called Chelsea Arts Tower, will house art galleries on its bottom eight floors and office tenants on its upper floors. “We came up with the concept because we’ve been active in the neighborhood for a long time, and five times a week, we got calls from people asking, ‘Can I buy office space?’” says Stuart Siegel of Grubb & Ellis. “With the hot real estate market, the calls have increased exponentially.”
| SHOULD YOU BUY? CONSIDER BUYING OFFICE SPACE IF YOU: |
| Have stabilized the size of your company and are fairly certain you won’t be expanding or shrinking in the near future |
| Are buying for the long term —at least 10 years. |
| Think of this as a good use of your company'a cash. |
This rare “commercial condo” project makes sense for a company that expects to stay the same size long-term, Siegel says. “A company that has a fairly stable number of employees and sales volume is a good candidate.”
Floor sizes in the building range from 3,100 to 4,700 square feet, with asking prices from $700 to $1,000 a square foot, or anywhere from $2.2 to $4.7 million. The annual costs connected with buying in Chelsea Arts Tower (including mortgage payments, taxes and common area charges) will likely be somewhat higher than renting in the area, but not by a huge amount. Average annual rents are $35 to $40 per square foot in that part of Chelsea, Siegel says. Siegel says nonprofit foundations have expressed interest in buying, in addition to film production, fashion and media companies.
“Nonprofit foundations are some of the best candidates for this kind of space,” he says, adding that nonprofits don’t have to pay real estate taxes.
Mortgage brokers look for the same things that they would with a residential mortgage: income, stability, assets and liabilities (e.g., debt). Typically, the buyer would put down 10% at signing and another 10% when the slab is poured for the floor, with the balance due at closing. (Usually, 75% financing is available for commercial condos.)
Obviously, putting money down for office space means there will be less working capital to operate one’s business. But if available capital is not a major issue for you, the pros of buying office space include having fixed costs (you can lock in a given mortgage rate compared to the unpredictability of rent increases) as well as tax deductions in the form of mortgage interest and property taxes. There is also the possibility of renting out extra office space, which can add another source of income, and, of course, the prospect of property appreciation.
Siegel says most buyers looking into the Chelsea property are taking the long view, thinking perhaps of selling the property once they retire. “They are looking at a 20- year horizon,” he says. “They realize that [West Chelsea] is still in its infancy.”
Stuart W. Elliot is the editor of The Real Deal, a monthly magazine covering the
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