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Condo Office Management - A Mindset Shift

Date: 8/21/2006

      Landlords no longer rule. At least not in the new wave of office condominium developments where the landlord-tenant relationship has evolved to be a partner-partner relationship. In these developments the landlord is challenged to treat the former tenant's position as an equal owner with the same rights, privileges and respect.
      In contrast, the former tenant, who is now an owner, is also challenged to understand the concept of "joint ownership" in a project. They must adapt their thinking not only to respect the owner's point of view but also act accordingly with regard to the rules and regulations that an owner must follow.
      It requires a mindset shift by both the developer and former tenant in a cooperative effort to understand each other in their new roles as partners and change the traditional landlord-tenant relationship, which is easier said than done.
      Developers of office condominium conversions must adopt the same mentality as high-end home builders. They need to understand that owners who used to be their tenants are now their best ambassadors in selling and closing out the project. To gain their support, it is imperative that the developer be responsive to their needs and concerns.
      "Office condo conversions are just as challenging for the tenant, but are the perfect solution for a small-business owner," said Jeff Janicik, president of Innoflight Corp. of San Diego. "It's similar to how apartment conversions or starter homes are for first-time buyers.
      "As an owner of a space I formerly rented, I now have a custom lease between myself and my company. As a result, I no longer pour rent dollars into a third party without the benefit of gaining equity."
      It is important to involve a professional property management company early in an office condominium development renovation process to implement and activate procedural guidelines that include:
•  Review practical application of by-laws and CC&Rs.
•  Working knowledge of building mechanical systems.
•  Certify common-area improvements in "agreed upon" condition.
•  Monitor escrows and closing dates.
•  Track invoices and bill association dues.
•  Guide smooth transitions when owners' units close escrow.
•  Provide owners with emergency contact information.
•  Assess realistic budgetary constraints and reserves.
      Most important, a manager is the developer's liaison with the new owners during renovation of common-area improvements and is charged with ensuring smooth transitions when owners' units close escrow.
      During this process, the manager must handle property problems and emergencies quickly in order to establish the standard of a well-maintained and cared-for property.
      When the new owners have a substantial financial investment in their office environment, the whole project takes on a new attitude and concern about the standards of cleanliness and curb appeal.
      In addition, financing for condominium office conversions should be structured specifically to have adequate reserves to fund necessary repairs and replacements prior to turnover and should include funds for the developer's portion of the association dues.
      When developers fail to include the cost to cover the dues on the unsold units in their development budgets, it can have serious repercussions. Associations are established as nonprofit mutual benefit corporations, and delinquencies have a direct effect on the funds that support the day-to-day operation of the property.
      "The big attraction to owner-users is the opportunity to fix their occupancy costs rather than be subject to a landlord raising their rent periodically," said Barry Mahlberg, a broker with Burnham Real Estate. "There is no better way to invest in real estate than to have yourself as a tenant and enjoy the benefits of both."
      Owner-users ideally want a central location in a good area near their clients and their homes, with the potential for appreciation. They look for flexible floor plans and lots of glass. Office condominium-conversion properties exist in many areas of San Diego County, which provides small-business owners with numerous locations to satisfy their requirements.
      The popularity of office condominium conversion developments is destined to increase. Those developers and former tenants who are involved in them will be put to the test of understanding each other and their new relationship.
      The success of their relationship ultimately will depend solely on both parties entering into it with a total awareness and acceptance of the common responsibilities they share to achieve the goal of multiple owners living under one roof in harmony.
     
      - Colleen Nemeth is director of real estate at Spectrum Property Management in San Diego.