Commercial Condos - Should You Buy?

Is a commercial condo the right solution for you? You own a successful business and grate every month when you write that rent check to your landlord. Wasted money is the typical thought. You own your own house, so why not own your own office or flex space? But you know this is not a very simple analysis of rent vs own. For many valley firms, change is constant, whether you are growing or you are downsizing. The static solution of buying your business space may fit your needs today, but will it in the future?
Tax benefits are interesting too. Most people would image owning your own space would benefit you the most, as does owning your own home. But for a business, you can deduct all your space costs (rent and otherwise) if you lease, but are limited in what you can write off if you buy. Yes, there is depreciation (over 39 years for the building) when you buy, but that tends to have limited impact on the analysis.
The purchase of a commercial building to occupy tends to work best for a company with a relatively flat space needs requirement. Or, if you have deep reserves, a larger building would work where you can grow within it over time. Drawbacks of course are the need to manage the space you currently do not occupy. Read: you now have a new job of being a landlord as well as CEO of your company.
Difficulties to overcome are on either side of the fence. A business owner at the end of his lease if faced with quite a lot of stress. Do not expect that the landlord will always renew a lease, no matter at what rate. And if the landlord doesn't, then where shall you move to? If you have a business that is not readily accepted in most zoning areas, this may be a long and hard search for the right space. Automotive, liquor stores, restaurants, medical to name a few all have their suitability issues in regards to zoning, parking, nimby's, etc.
Limitations aside, this is a big plus for owning your own space. Just make the right decision for your company long term. And one final thought, try not to mix your need to invest with your need to guide your business. There are many ways to invest, they do not necessarily have to be paired with your business needs.

Local NNN investments - valuable or overpriced?

It's amazing how the vast amount of wealth in the Bay Area keeps capitalization (cap) rates so low. Everyone wants their investment property to be brand new, fully occupied and ideally within a couple miles of their home. The age of the property around here will almost never be as new as you would want. So people settle for 40 and 50 year old product. Fully occupied - not too difficult as the cost to build keeps inventory down and tenants have fewer choices. But location has always been the key (ever heard location, location, location?). And with so much capital created in Silicon Valley over the last few decades, this has made the demand for local investments huge.
Some opt for it and others look past the horizon to the East. Would you buy a $2,000,000 single tenant Burger King on El Camino in Sunnyvale for a 5.5% cap rate. A rate, mind you, less than the cost of the money you would borrow? This is called negative leverage - not something most would do with the normal investment guidelines as a model.
But the cap rate is only one part of the return on investment. Rent growth, appreciation, cash flow, cost recovery (depreciation) and the all-so-important pride of ownership play equally important roles. Land value and the use of a property are also very critical here. Talk to a company like In & Out Burger as to what it takes to open a new site, especially the difficulty of getting a drive-thru approved. So, the older, established locations are very valuable in that they face very little future competition.
It may take a large capital infusion to own a single tenant commercial property in the Bay Area, but its future value is very secure. This tends to be purchased by investors selling a well-appreciated asset and looking for better cash flow and stability. Many passive investors leaving the headaches of destructive tenants, leaky toilets and rent control ordinances find comfort in a 10 year lease with few, if any, landlord obligations.
I truly believe that opting for the better location & lower cash flow property which has great stability will keep you comfortable (and traveling for the right reasons) years in to the future.

Friendlier lenders due to rising bad loan volume

I just dealt with two separate lenders on two apartment building in the South Bay. Both were very similar in their approach to owners who were upside down on their equity positions. Very helpful to have the owner come to a payment plan solution. One of the lenders, who I have dealt with in the past few years had a marked change of attitude. Apparently with so much bleeding going on, especially in their loan portfolio, they are being nicer to their customers. Feels similar to the "new" IRS that came about in the last 5 years.
Yes, rents are rising and vacancies are dropping, but that hardly outweighs the burden of rapidly rising adjustable rate mortgages. There will definitely be a wave of debt restructuring by borrowers who are savvy and foreclosures for those who don't know how to work the system. Thought for the day: Take action NOW - all those pending items on your desk or kitchen counter, pick one up and act on it.