Office space goes condo as trend takes hold in L.A.: professionals opting to buy rather than rent.

When Andrew Harrison Barnes, chief executive of BCG Attorney Search Inc., moved into an airy 12,500-square-foot office in Pasadena three months ago, he gained a new title in the process: condo owner.

Instead of spending $2.38 a square foot to lease space in the heart of the pricey Class-A office district, Barnes plunked down $4 million to buy an office condominium in a mixed-use project called the Pasadena Collection. He invested another $1 million to build out and furnish the raw, second-story space.

"It's a smart thing to do as the price of rents keeps going up," said Barnes, who moved 40 employees from downtown Los Angeles. "I don't know why more people don't do it because you get tax deductions and the Small Business Administration underwrote the loan."

After crunching the numbers, Barnes decided it was better to rack up equity in South Pasadena's booming real estate market than to continue paying rent. Previously, he was shelling out $7,000 a month to lease about 6,000 square feet in the Oviatt Building in downtown Los Angeles. Now he pays about $20,000 (including condo fees), which is partly offset by a tax deduction on his mortgage.

It's a concept that's in use elsewhere in the country, but has been slower to catch on with Southern California developers. To date, there has been a smattering of office condo development, as part of mixed-use projects in downtown L.A., the Pasadena area and Hollywood.

Most of the units that are built are sold before they hit the market, attracting architects, non-profits, designers and lawyers. "At this point there's a lot more demand than supply," said Doug Marlow, senior vice president of CB Richard Ellis. "The market for single-user facilities has gone through the roof."

Weak demand from tenants

Dentists and accountants pioneered the concept of office condominiums decades ago by converting residential property. Today, office or commercial condos are proliferating in cities such as New Orleans, Houston and Washington.

Here, low interest rates have made office tenants increasingly eager to become owners--and less eager to rent.

The developer of the Pasadena Collection, Champion Development Group, originally designed the $40 million project as a 150,000square-foot Class-A office building. But weak demand for leased office space prompted the firm to cash in on the hot housing market with 38 lofts and 18,000 square feet of for-sale office space.

"A number of residential loft buyers asked if they could purchase some of the office space instead of renting it," said Robert Champion, president of the group. "We mapped the office floor into multiple units and sold them as office condos. We expected it to take a year to sell them. All but one was sold prior to completion."

Office condos work just like their residential counterparts, with buyers paying mortgage, property tax and association fees. Developers say ownership confers a number of benefits: flexibility to design the space; tax deductions and special capital gains treatment; and a retirement nest egg that builds equity. With interest rates hovering at 5 1/2 percent, firms can set up shop in markets they normally could not afford.

SBA spokesman Frank Brancale said small business loans allow firms to amortize the purchase over 25 years, resulting in significantly reduced monthly payments that free cash flow for other investments.

"Instead of having a fistful of rent receipts, they are moving into ownership of a facility," Brancale said. "It becomes a very valuable asset over time and bolsters the balance sheet."

While developers in other parts of the country devote entire complexes to for-sale office units, local builders find that the product works best in projects with residential and retail.

Developer Mark Weinstein's firm MJW Investments will include 100,000 square feet of commercial condos in Santee Court, a 578unit residential complex in L.A.'s Fashion District. The spaces range from 1,000 to 10,000 feet, and will retail between $350 and $400 a square foot.

"People have a real desire to own rather than create the expense of office rent," Weinstein said. "It's kind of like people have dipped their toe in the water and are still evaluating the market and opportunities."

The for-sale units have found a natural fit throughout the Fashion District, where soaring rents squeeze out many struggling designers. The San Pedro Wholesale Mart opened three years ago with 187 units, which were quickly sold. An additional 118-unit annex was completed last October, with spaces ranging from 600 to 2,300 square feet.

Residential appeal

For some developers, office condos are a draw for residential tenants looking to cut lengthy commutes by working close to home. "We built the office condos as somewhat of an amenity for the tenants," said Avi Brosh, president of Palisades Development Group, which plans to develop five units in the Hollywood Equitable Building.

The building will include 96 residential condos in addition to the offices, and is expected to open in early 2006. The loft-style offices will average 1,200 square feet with high ceilings and polished concrete floors. Brosh said they will sell for between $300 and $500 a square foot.

The concept makes sense for developers who want to turn a profit on ground-floor space without the hassles of managing a retail tenant. Torrance-based Decoma Industries built a 1,500-square-foot office unit on the ground floor of its South Pasadena Mission District Lofts, which sold immediately to an architecture firm for $360,000.

"The first floor is so close to the street it's not conducive to living," said Steve Notaro, the firm's president. "It benefits both parties for us to do this."

Carlos Chavez-Andonegu, who owns ADM Architects Inc., bought the 1,500-square-foot office condo on the project's ground floor. He and five employees relocated from a space half the size three blocks away on Fair Oaks Avenue, where they were hidden inside the building without any visibility. Chavez-Andonegu said the new office's busy street, lined with restaurants and galleries, has brought him several walk-in clients. After improvements, including a conference room, cubicles and a drafting area, the property was valued in a recent appraisal at about $760,000.

"Whether residential or commercial, most people would rather own," he said. "We never know what's going to happen as far as value or the market, but at least you own it and you can sell it when you retire."

Despite the market's growth, there are some downsides to ownership. A mortgage commitment, for example, makes it tougher for companies to move quickly, and rising interest rates could make it trickier to find buyers.

"Interest rates have to be low enough so that the debt service on mortgage payments is in line with occupancy expense," Champion said. "If interest rates went up substantially, it would prohibit continued growth."

Hefty homeowner association fees, which are assessed per square foot, can also be strong deterrents. In Barnes' case, the firm pays about $8,000 a month.

"We were against buying at first because of the maintenance costs," Barnes said. "But it made more sense to do it in this building because it offered a better location and better presence for our clients."