Often, I am asked by my clients whether they should consider converting their commercial building into a condominium. If you are thinking about selling a commercial property that you own or plan to build in Maryland, then you may want consider this opportunity. It is very possible you could generate a more favorable return if you create a commercial condominium by splitting the building into units and selling them separately. The market is changing constantly, and that is a conversation you need to have with a real estate broker before any decisions are made.
As I have been talking to my commercial real estate clients lately, I have heard a couple of scenarios repeat themselves. One school of thought is that the parts are worth more than the sum. In other words, higher demand for smaller units can let you set a higher price per square foot. It can also be a good way to start to recoup your investment more quickly. Even if it takes a while to sell all of the units, a stream of deals can keep the cash coming in. In the interim, you can still collect rent if you are dealing with currently occupied space. The flip side is that it could indeed take longer to close multiple, smaller deals than to sell the property in a single transaction. So your comfort with sitting on your underlying investment is key to the decision.
If the building is new construction with no occupants, your calculations may be a little easier. You can also create a condominium out of an existing occupied building with current tenants. The tenants could either decide to purchase their units, or remain as tenants, and you can sell the units to new owners looking for an investment property.
Of course, the approach you take can have some tax consequences. Selling the building as a whole, selling individual condominium units, and/or retaining ownership of some or all of the building and the units and leasing the units to tenants all have different implications. Your accountant needs to be a key player in the early stages of your thought process.
In Maryland, the good news is that a commercial condominium does not generally require separate approvals from government agencies the way residential condominiums do. The best course is to work with both an engineer and an attorney as you figure out how to structure the project from both a physical and a legal point of view. The key is starting with properly drafted documents so that when you shift into the sales mode the process is set up to run smoothly and simplify the negotiations with potential buyers.
If you have a property that you believe might benefit from a commercial condominium conversion, I would be happy to discuss the process and your options. Please contact me by e-mail at mfaerber@mcmillanmetro.com.