In boom years, office condos took the South Florida commercial real estate market by storm, just like every other innovation in a bubbling market. In 2007, interest came to a screeching halt. Now the concept — in which businesses own units of a larger building and pay for common-area upkeep — is reemerging with a twist: lease-to-own.
The office condo market stalled because many industry watchers expected 2007’s all-time high office rental rates to nosedive in 2008, making purchasing a lose-lose proposition in the face of tighter credit and higher down payments.
But rental rates didn’t decline at most properties. According to Cushman & Wakefield’s fourth-quarter Miami office report, the market notched an overall rental rate average of $30.87 per square foot in 2008, up 6 percent from 2007.
From a logical perspective, companies looking to lease should entertain a lease-to-purchase option in the current economy, said Alan Kleber, a senior director at Cushman & Wakefield’s Miami office.
“A lease is a financial instrument,” Kleber said. “It doesn’t mean you have to exercise your right to buy, but if the developer is prepared to negotiate half of your $100,000 in annual lease fees toward the down payment on a purchase, you have the equity you require from the bank to potentially close on your unit.”
To be sure, the underlying benefits of office condo ownership that drove the craze in 2005 and 2006 remain valid. Companies can pay a mortgage for about the same price as leasing. The former offers equity. And lease-to-own office condo options ease the credit crunch for companies that want to invest.
Galleria Corporate Centre in Ft. Lauderdale now offers a lease-to-own option. Here’s how it works: A company enters into a one-year lease agreement for an office space. If the rent is $8,000 a month, the total investment in office rent at the end of one year is $96,000.
If companies decide to exercise the option, the developer puts 50 percent of the 12-month rental payment toward the down payment of the office condo. This enables firms without strong cash positions to own the same office they’ve been renting.
“We didn’t overpay for our building like many developers who rushed from residential to commercial when the market changed,” said Hank Bush, principal of Bush Development Group, the Miami-based commercial real estate developer behind Galleria Corporate Centre. Bush also developed the first office condo on Brickell Avenue, 1000 Brickell.
“We can still sell to an end-user for a price that allows him to buy that space for roughly the same amount of money he would lease it,” he said. “With all-time low interest rates, people can lock in their mortgage and won’t deal with rising office leases when the market rebounds.”
The Galleria has only seen a handful of takers for its lease-to-own option since November, but Cushman & Wakefield’s Kleber expects to see more companies opt for this arrangement as the oversupply heightens.
“Lease-to-own offices are a no-lose proposition for a user,” Kleber said. “It’s a tool a company can use in order to try to confront the market and provide smart solutions to getting a handle on occupancy costs in this economy.”