Commercial condo developers think big: spiralling office rents make owning your own a valid option.

As the office market in Manhattan continues to tighten, tenants are finding that they can fork out exorbitant rent while submitting to the leasing terms of in creasingly powerful landlords.

Or, they can pursue another option, which is becoming increasingly attractive because it does away with rents and landlords altogether. Office condominiums--which permit tenants to own the space that they occupy--eliminate rental payments, put tenants in control of their own offices and also allow them the alluring opportunity to potentially profit on their investment if city real estate continues to rise in value.

Data tracking the sale of condo space shows that it is becoming more popular among office tenants. According to figures from the data collection firm Real Capital Analytics, $1.5 billion of commercial condos were sold in the first half of 2007, which if doubled to project the year's tally, is ahead of last year's $2.4 billion in sales and the $1.1 billion total from 2005. This year's $325 per square foot average price for condo space is the same as the 2006 average and is actually down from 2005's $337 rate, meaning that the gains are mostly reflective of a rise in the volume of sales.

The increases, which measure transactions nationwide, correlate with rental gains that many cities have experienced in recent years.

Office condos have long been popular among not-for-profits and charitable groups, because they allow tax-exempt organizations to avoid paying real estate taxes, a cost that they would otherwise have to cover if they were leasing space because taxes are built into commercial rents. Real estate experts say that the savings these tenants are able to realize typically amounts to between $5-$10 per square foot and that this discount is a principal reason why tax free entities buy rather than rent.

Regular tenants aren't allowed the same tax benefits of course, but owning space provides a host of other advantages. For one thing, tenants who own don't have to worry about lease extensions, which are becoming trickier to negotiate as landlords increasingly enjoy the upper hand in leasing negotiations because of the scarcity of office space in hot office markets like Manhattan. With space at a premium, landlords are also more apt to refuse to renew a tenant's space in order to accommodate the move or expansion of a favored tenant or a space user who is simply willing to pay a higher rent.

Tenants who require special installations and incur a significant expense in outfitting their space are particularly concerned with the possibility of getting bumped from their space and prefer to protect their investment through ownership.

Michael Rudder, a director of office leasing and sales at the real estate investment and management firm Time Equities, was banking on the allure of this type of stability when he recently led a team of investors to purchase the roughly 13,000 s/f 6th floor of 820 Second Avenue.

He said that he is dividing the space into four separate units and plans to sell them to doctors and dentists; tenants that will require pricey build-outs in order to install the necessary medical equipment for their practices. Rudder said that he is offering the space for a price that, if mortgaged using a typical loan for around 80% of the value of the asset, would have a carrying cost commensurate with a rental rate in the $60s per s/f.

Such a rate is high for the type of space that Rudder is offering, but Rudder pointed out that tenants would be able to recoup a large portion, if not all, of the money when they sold the condo and that, in the meantime, tenants would be guarded from the sharp rental rises that real estate experts are predicting for Manhattan as vacancy rates continue to dwindle.

Overall, commercial condo space comprises just a tiny niche category in the Manhattan's massive real estate market. Experts say that the reason for this is because commercial condos only come into vogue during times when the rental market becomes exorbitant, which has happened in the city only in the past year, meaning that demand is only starting to percolate now.

Rudder's project is one among a handful of new commercial condos being rolled out now to meet the rising interest among tenants. The new condos could be indication that a culture of ownership is beginning to take root among tenants in Manhattan in a way that could perhaps change the landscape of what has overwhelmingly been a rental market.

"Practically every tenant I work with, their dream scenario which they come to me with is to buy an office condo," said Jeffrey Nissani, the head of the boutique real estate brokerage JSN Properties, which handles small to midsize office deals in midtown and midtown south. Nissani, who was recently part of negotiations to sell two commercial condos, said more tenants would buy them if there wasn't such a shortage of condo space on the market.

But it may not be in such short supply for long.

Time Equities has jumped on the trend and is planning to offer significant blocks of commercial condo space at two buildings it recently purchased in midtown, 70 West 36th Street and 131 West 33rd Street. Rudder confirmed that the buildings will be a mix between traditional rental space and condos for sale, but he didn't say what the ratio would be because the plans were in a preliminary phase.

Buying buildings for conversion into rental/condo hybrids may become increasingly attractive among investors because it allows them to pay off portions of their debt in short order.

"You can buy a space for $100 million, sell half of it as commercial condos and yield $75 million," Rudder said. "So the half of the building that you bought for $50 million now is $25 million and whatever rent you receive from it will constitute a much higher return on your investment. It's basically a way of quickly increasing your yield."

Time Equities also purchased 185,000 s/f of condominium space at 633 Third Avenue from the government agency the Empire State Development Corporation for $100 million late last year, although that deal was done for investment purposes rather than to break up the space and resell it in pieces to condo tenants. Aside from the ESDC, the governor's office and the state comptroller also occupy three of the condo's nine floors. As part of the deal, Time Equities sold the ESDC a 165,000 s/f block of condo space at the downtown office building 125 Maiden Lane so that the agency could relocate.

The ESDC however has reconsidered its decision and will stay, along with the governor's office and the comptroller, at 633 Third Avenue until all three can move to the Freedom Tower when it is completed in 2011. The change in plan exposes what critics of condo space frequently cite as one of its chief shortcomings; inflexibility.

"If you have a condo that you're not going to occupy and you want to lease it to tenants, suddenly you're in the real estate business and that's a commitment that not a lot of tenants want to make," said Jonathan Serko, a senior vice president at the real estate services firm Cushman & Wakefield, who has handled a number of large commercial condo sales but sees a limit on their popularity in the city marketplace. "That's what landlords are for."

Serko also mentioned that tenants are sometimes wary to lease space from condo owners because they don't have the power to make improvements to the building.

"If you have a condo building, who makes the decisions for the building?" Serko said. "There's not one person or entity in charge who says we're going to upgrade the elevators or the lobby. If you have a number of condo owners, who own different pieces of the building, it's a very complex structure."

Audrey Novoa, a commercial real estate broker at the real estate investment and leasing firm Murray Hill Properties who recently sold a $20 million commercial condo at 211 West 61st to the Gateway School, noted that large tenants aren't interested in buying condo space because it doesn't easily allow them to expand their offices to accommodate growth.

"If you're a financial firm or a law firm and you're doing well, it's not like you can just buy more space in the building," Novoa said. "Usually there is no more space, whereas if you're renting you can move to another building without any strings attached when your lease is through or negotiate so that the landlord can free more space for you in your existing location."

Yet the ESDC has been able to slip past what are considered the typical snags and has already sold most of its space for a profit at 125 Maiden Lane, less than a year after purchasing it.

Even though segmenting an office condominium into separate units requires a lengthy approval process from the state attorney general, the ESDC successfully divided the space so that it could sell three floors totaling

70,000 s/f to the U.S. Fund for UNICEF. It also has sold one of its seven floors in the building to the Guttmacher Institute, a non-profit agency. Rudder said that the state, which never disclosed publicly the price that it paid to buy the space at 125 Maiden Lane, made a 16% profit on the floors that it has sold so far.