Do you own a multi-tenant commercial building that is experiencing reduced profits? Inflation, rising interest rates and the ability to deduct depreciation on the building for tax purposes nearing the end negatively impact project cash flow. Most building owners at this juncture will seek to sell the building as a rental property to an investor. However, there is another option that can benefit your bottom line! Converting the building into a commercial condominium so that the leasable spaces can be sold off to multiple third-party purchasers as condominium units may be the best decision.
Obviously, the first task to complete when contemplating a conversion project is to conduct an economics feasibility study. If the study demonstrates that the aggregate gross price of selling commercial condominium units in the building is greater than the gross price of selling the building to an investor, a conversion project should be considered.
Although an outright sale to an investor is faster, easier, and typically less risky than undertaking a conversion project, your unique circumstances may mitigate this risk. If you are fortunate that your building is in Texas, you already have one factor in your favor. Complying with the Texas Uniform Condominium Act (“TUCA”), the statutory framework that provides for condominiums as a form of real property ownership, is relatively less complicated than in other states. And for non-residential projects, some of the more tedious requirements of TUCA can be waived by agreement. Likewise, local zoning and ordinance laws typically do not discourage conversions of buildings into condominiums because they don’t impact adjacent properties since the use is not changing.
Furthermore, if your building is at capacity or close to it, you have an existing group of prospective purchasers. Your tenants will already know what it’s like to operate a business from your building, and if they have been successful, they are likely to be interested in making an investment into the building. It would be wise to work with a bank that not only will provide the financing to undertake the conversion project but will also be willing to loan purchase money to your tenants that wish to purchase a unit.
Finally, right now, the competition in Texas is minimal. There are not that many commercial condominium developments. But lack of competition doesn’t mean the project will be successful. Like any real estate development endeavor, the availability of financing, proper documentation, efficient management and engaging the assistance of a skilled attorney is critical.
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