With the commercial real estate market in flux because of the post-COVID-19 economy and changes in work patterns, owners of leased commercial buildings, such as office buildings and industrial warehouses, are considering how to make their properties and their investments in them more attractive. We have seen a good number of commercial properties being repurposed for residential use, either by reusing the existing structure of the commercial building and creating residential spaces in them, or by tearing down these structures and redeveloping them into residential uses.
However, another option to consider is converting commercial buildings into commercial condominiums, to allow you to sell some or all the condominium units created as a result of the condominium process and possibly generate a more favorable return than if you were to try to sell the entire property. The market is changing constantly. That is a conversation you need to have with a real estate broker before any decisions are made.
One school of thought is that the parts of a building are worth more than the total. That is because higher demand for smaller units could 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 could still collect rent if you are dealing with an occupied space. The flip side is that it might take longer to close multiple, smaller deals than to sell the property in a single transaction. Therefore, 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. However, you could 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 could sell those leased units to new owners looking for an investment opportunity.
Of course, the approach that you take will have tax consequences. Selling the building as a whole, selling individual condominium units, and/or retaining ownership of some or all of the building, and leasing the units to tenants all have different tax implications. Your accountant needs to be a key player in the early stages of your thought process.
In Maryland, creating commercial condominiums does not require separate approvals from government agencies the way residential conversions 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, or if you have other commercial real estate or business legal needs, please contact Michael Faerber at 301-251-1180 or mfaerber@mcmillanmetro.com.
