“There’s been a tremendous surge of owner/user building sales over the last two years and commercial condos are the next step in that evolution,” says Mark Read, senior managing director of CB Richard Ellis in San Diego. (photo/J. Kat Woronowicz)

When Scott Mowrey and his five partners at Cohen, Miskei & Mowrey searched Los Angeles to buy a branch office for their growing CPA practice in Sherman Oaks, they came up empty-handed. The buildings they found were too big and too expensive.

Unbowed, Mowrey turned his attention south to San Diego County, his birthplace, and found what he wanted — an office condominium complex that will break ground in November in the Old Town Business District of San Marcos. Developer North Point Ventures is calling it Park Place North and will place a three-story, Class A office building on the 1.6-acre site that will feature 18 units ranging in size from 1,300 square feet to 2,900 square feet — ideal specifications for Mowrey and his partners, who are purchasing two of the units for $1 million and plan to move some of their staff into the offices shortly after the complex is completed next summer.

“The opportunity to do something like this — the condo office-type deal, is limited,” says Mowrey. “There are not a lot of these things around.”

Maybe not in Los Angeles, but San Diego County’s real estate market is seeing an upsurge in the planning and construction of office and industrial condominiums specifically tailored to small business executives yearning to buy their own piece of real estate. “You can at least get some of the benefits of ownership without having to invest a large sum of money for a large building,” says Mowrey.

Market forces driving the renewed interest in office and industrial condos — also called commercial condominiums — are historically low interest rates, certain income tax and financial benefits from owning rather than leasing, competition among bankers to sell Small Business Administration loans and, not least of all, pride in ownership. “Business owners take pride in the appearance and functionality of their offices because their premises reflect the quality of the goods or services they provide in their profession,” says San Diego real estate attorney Archie Wright. “Small business owners do not have sufficient revenues and personnel to occupy an entire building or full floor of a high-rise, but nevertheless these business people do appreciate the long-term protection from rising rents and the investment value of owning their own business premises.”

Mark Read, senior managing director of CB Richard Ellis in San Diego, has been watching the trend escalate. “There’s been a tremendous surge of owner/user building sales over the last two years and commercial condos are the next step in that evolution,” says Read. “In a market like San Diego’s, which is fundamentally a small business economy, you’ve got a lot of entrepreneurs and startup companies where the owner says, ‘Why don’t I buy this building and lease it to my company?’ People want to own real estate in San Diego and the combination of low interest rates, which effectively lower occupancy costs to at or below rental rates, and the potential for appreciation, makes it financially attractive.”

Virtually every area of the county has commercial condominiums in the building or planning stages, including Encinitas, Vista, Carlsbad, Oceanside, Escondido, Chula Vista, Otay Mesa, Kearny Mesa, East County, Downtown San Diego and San Marcos. Some of the projects were finished last year and are occupied.

Artist’s rendering of Park Place North, a 38,514-square-foot office condominium project scheduled to break ground in San Marcos in November.

Developers like North Point Ventures can’t work fast enough to satisfy the demand. The company that is developing Park Place North in San Marcos for Mowrey’s CPA firm and others is planning to build a second office condo project nearby of 35,000 square feet that will cater to small business users and the medical industry. Construction is slated to start next year on Park Place South. “We plan to build another office condo project Downtown and are in the negotiation stages to design and sell 50,000 square feet,” says Jeffery McCormack, North Point Ventures principal. “We plan to build another office condo project in East County and are in negotiations to design and sell 40,000 square feet.”

A sampling of other projects:

• The Balfour Court Corporate Center in the Carlsbad Research Center adjacent to Palomar Airport is a 50,000 square-foot, two-story tilt-up office building now under construction. Real estate developer Lawrence Woodward and Shea Properties are partners in the development of the $9 million project, which may include about 20 individual suites depending on the amount of space each buyer purchases. Woodward says at least five companies have signed letters of intent to purchase suites in the building, including two accounting firms, an engineering company, a sports management company and a law firm. None of the sales will close escrow until the building is constructed.
  
  

  Medical Real Estate Development Co. will start construction this month on Eastlake Medical Plaza at Eastlake Parkway and Miller Road in Chula Vista, an office condo project tailored to doctors, dentists and other medical professionals.

• In the Eastlake area of Chula Vista, Medical Real Estate Development Co. of Temecula will start construction this month on Eastlake Medical Plaza at Eastlake Parkway and Miller Road, a three-story complex with 14 units for doctors, dentists and other medical specialists. Ed Anderson, managing member of the development company, says the building has already been sold out.
  
  
• In May, Medical Real Estate Development will start building another office condominium complex a few blocks away from Eastlake Medical Plaza. This one, also tailored to medical specialists, will consist of 16-18 units in three separate buildings. “We’ve done about 13 or 14 of these projects in Riverside County and the Eastlake projects are our first in San Diego County,” says Anderson. “And we’re looking at other areas. We’ve had some doctors approach us for projects in Escondido, Poway and Chula Vista.”
  
  
• The Chula Vista Distribution Center on Main Street in Chula Vista, a project tailored for industrial uses, was completed in August by Voit Development Co. and features 11 units averaging 7,650 square feet. One of its selling points is that each unit includes a dock-high loading door and a grade-level door. Peter Quinn, Voit’s vice president for development and acquisitions, says the units are being offered for sale or lease. Most of the units sell for just under $1 million. “We have one in escrow now and are leasing the premises until escrow closes,” says Quinn.
  
  
• In Otay Mesa, Voit Development is refurbishing two buildings in the Amistad Industrial Center for use as industrial and office condominiums after the end of the year. Combined, the structures will be able to accommodate up to 50 units. Quinn says his company has feelers out in every market in the county where it can either purchase existing projects or the land on which to build office, industrial and retail buildings for sale.
  
  
• In Escondido, Pacific Coast Properties and Butcher Armstrong LLC developed the Wineridge Place Condominiums in February 2003, a single building containing six office units, all since sold.
  
  
• In Vista, Pacific Coast Properties built the Focus Industrial Center comprised of four buildings on Cades Way and four buildings on Grand Avenue. Most of the property has been sold, says Joe Deutsch, principal of Pacific Coast Properties. “Like all real estate, these little buildings are going up in value as much as houses are,” says Deutsch.
  
  
• In Oceanside, a three-company development team is planning the construction of Pacific Coast Business Park, a $250 million-plus, 152-acre master-planned project north of Rancho Del Oro Technology Center. The project will include about 1.85 million square feet of research and development, manufacturing, distribution and office space. Office and industrial spaces will be offered for sale and lease, says Larry Strickland of Lee & Associates Commercial Real Estate Services, listing agent. Pacific Coast Business Park is a joint venture between The Monarch Group of La Jolla, DWO Enterprises of Solana Beach and Guthrie Development of Orange. Construction is scheduled to begin in early 2005 with completion in 2007.

Getting The Money

Peter Quinn, vice president of development and acquisitions for Voit Development Co., says the company built industrial condos in Chula Vista and Otay Mesa in response to high demand. “They are good values, very financeable,” he says. (photo/J. Kat Woronowicz)

SBA loans are the principal financing vehicles for small businesses buying commercial condos and the SBA 504 program appears to be the most popular. A typical loan of this type would require the borrower to make a minimum down payment of 10 percent of the purchase price. Fifty percent of the remainder would be loaned by the bank and a maximum of 40 percent would be loaned by the SBA.

Local bankers are processing a lot of these. Marty Spuehler, vice president and SBA department manager for San Diego National Bank, says the bank has processed more loans over the last three months than it processed all of last year. “Next year we’ll see a higher volume,” he says. Elizabeth Schaper, business development officer for Banco Popular, says all but one of the units in the two condo projects in Eastlake by Medical Real Estate Development Co. were purchased through SBA loans. “People are buying these (condos) because the cost per month is very comparable to what leasing costs would be,” she says.

The advantages of making monthly mortgage payments instead of rental payments are compelling to small business owners. “There are several considerations for the small business owner in making the buy vs. lease decision,” says George Chandler, head of the San Diego district office of the SBA. “With ownership, occupancy costs are predictable, versus market driven with rentals. Instead of landlords gaining rising profits through rent increases, the property owner can use the additional profits for business expansion and job creation — the major reason for SBA’s loan program.”

For tax purposes, says Chandler, the business owner can depreciate the improvements to his or her business and deduct loan interest payments. “Long-term property value appreciation has the major benefit of creating wealth for the owner,” he says. “The business’ real estate becomes a major part of many small business owners’ retirement plans.”

When It Makes Sense

Randy and Marion Davis, owners of Davis Medical Electronics, a distributor of medical equipment and supplies, purchased a building in the Focus Industrial Center in Vista with an SBA loan and moved from Carlsbad in December. “We had been leasing for many years, putting in improvements for other people,” says Marion Davis. “The SBA loan makes a lot of sense.” And Jim Philion, who restores vintage NASCAR vehicles as part of his business, American Iron Racing LLC, says he purchased space in the same complex because it provided him room to create a museum of old racing cars. Philion, a former president of the Holiday Bowl who once headed Thrifty Car Rental’s worldwide business, had previously been working out of a garage in Rancho Santa Fe. Dr. David Littlefield, a dentist leasing space in Chula Vista, purchased a 3,800-square-foot office condo in one of the Eastlake projects through the SBA and is debating whether to keep both offices open. “If you look at it over 10 years, it’s cheaper than leasing,” says Littlefield.

The incentives to own rather than rent come mainly from real estate market forces rather than income tax advantages, says real estate attorney Wright. “Renters face the real prospect that their rents will escalate in the future because the developer’s construction costs for land, steel and concrete have risen at least 25 percent in the last year,” says Wright. “The commercial condominium owner seeks to lock in his occupancy costs and build real estate equity.”

Wright says the business owner who buys space insulates himself from rising base rents since his mortgage payments are fixed by the terms of his loan, not the landlord’s rising development costs, and he builds equity with the principal portion of his mortgage payments. “The owner has the opportunity for his equity to grow as the market value of his condominium appreciates — a phenomenon which no one can guarantee but few would deny has occurred quite regularly here in California over the past several decades,” he says.

Wright says commercial condominiums function much the same as residential condominiums but with somewhat fewer legal complications. In these projects, individuals or small associations of business people separately own their own units but jointly own and share the expenses of maintaining common areas such as lobbies, parking and landscaping either as co-tenants or members of an owners’ association. “Unlike residential condominiums, which are usually available only in one-, two- or three-bedroom models with limited interior variations allowed, commercial office condominiums are unique in that well-planned, new construction projects permit the buyer to purchase one or more adjacent units whose sizes and interior improvements can be configured to meet the owner’s precise needs,” says Wright.

To CPA Scott Mowrey, who played football and ran track at St. Augustine High School in the early ‘70s, earned an MBA from the University of Chicago School of Business and was lured to Los Angeles because salaries were “twice as much as in San Diego,” commercial condos are a great deal. “There’s a whole piece of the marketplace where small businesses want to own real estate,” he says. “This fills that gap nicely.”