"Commercial/Business Hacking" Instead of "House-Hacking"?

Question

I was just wondering today about the possibility of "business hacking" - whereby an entrepreneur that needs office/retail/commercial space to operate his/her business might buy a small office piece of commercial real estate, rent out other parts of the property, and operate the business from one of the units.

It seems to me like this approach might have much of the benefits of "house-hacking" in the sense that the owner gets to manage the property from right next door, and can more easily maintain a substantial piece of real estate without property management being needed.

Has anyone heard of entrepreneurs that operate in this way? I'd love to learn if this is something that successful investors do or if there are drawbacks to this approach that I am too inexperienced to see. I'd love to hear your thoughts on this.

Justin Ng · Answer

There was one startup company in NYC, the very first, that had leased out some floors several years ago and subleased the excess to other startups. I forget which it was, except that it is over a billion dollar valuation now.

It might've been WeWork, the current leading provider of shared office space. They've grown nationally and coordinate/office-match around a central app database, much like Uber or AirBnB. I believe most of it is standard commercial space up for sublease, with plans to renovate for attached "dorm-space" catering to the mid-20s startup crowd.

PivotDesk is another recent startup that works on matching mature companies with startups in need of space.

And Regus PLC is a shared-space company with leases on more traditional offices that has been in the business since the dotcom.

There's a small field of startups fresh with cheap capital in similar manner, looking to shake up traditional office-leasing. It's been an issue in Silicon Valley since the late-00s: landlords holding out on startups as the rental market heated over; startups frustrated with the multi-year lease while trying to get even the most basic product off-the-ground and uncertain if they'd even be around in a year.

Micki M. · Answer

I'm late to chime in but we've seen this thread before on BP and I definitely love the idea. Having worked in commercial leasing and sales it was a strategy that my former brokerage utilized to kickstart the Rino area several years ago so you can see how that turned out. And I have recommended it to many of my small business clients who were growing rapidly, often by creating partnerships with like-minded entrepreneurs.  Commercial space in Denver was cheap and abundant three years ago and now is in great demand so locally you need to be a bit creative to make the numbers work.  One thing to consider is how many co-tenants you can manage and how to manage them. It can be extremely time-consuming and not cost effective if the proper structure isn't determined from the beginning.

Bill S. · Answer

@Scott Trench I have been a part of a company that did it very successfully. The one thing is that the businesses were established and then they bought the office space. The owners of the business owned the building and the business leased it from them. In 15 years they owned the building free and clear and the business had grown from sharing the space to occupying the whole space. They then did a rinse and repeat. It's a real bonus for the company owners. My thought is that in the end, the real estate the company has purchased for the owners will be more valuable than the company they used to buy it.

Ed W. · Answer

@Scott Trench Like most decisions in real estate, it's not only CAN you do it but SHOULD you do it.  At the end of the day, your local office market should dictate (or at least suggest) whether or not purchasing or leasing is the better choice.

I am not a commercial guy but I do know that the Central Ohio office market has been weak for at least 20 years.  New Class A buildings seem to do well but the rest don't.  My real estate business has been a rental tenant (not an owner) for the last 25 years in an office suite that is part of an office condo complex.  Those office condos have not appreciated 1 penny since I've been there and my rent has not gone up once since I've been there.  My costs and liabilities have stayed low for the entire time I've been there and rent includes utilities, internet, copier, fax (when it was relevant), cleaning, etc.  The office was filled with tenants when I first moved in but over the last 10 years or so my landlord - despite his efforts and those of agents - has only managed to keep it about half full.  There was a period of time during the recession that within a mile radius +/- of my office there was about 1 million sq. ft. of vacant office space and there has never been a time in the last 25 years that the vacancy in the area  (at least to my knowledge) has ever been lower than about 15%.

Of course, I don't have a clue about the Denver market but you owe it to yourself to carefully analyze it.

Chanté Owens · Answer

I want to do this @Scott Trench, so I'll be curious to see the responses. When I was growing up, there were a few business people that were friends of our family. They had leased space for many years to do  business, and then when the landlord wanted to sell, they bought the buildings and rented out some of the space that they didn't use.

It's pretty smart, if you can afford to do it; especially if you can luck up and get a property in a decent area. Obviously the prime real estate locations would likely be too pricey, but if you can get something in an ok area where you could get decent tenants with longevity, then, in my opinion, I think it's a good idea.

Jonathan Makovsky · Answer

@Scott Trench I am in the process of looking into offices in my area (Stamford CT) for shared office. The lenders I have spoken to had said that LTV will be higher and rates slightly lower because owner occupant/lower risk. (Not sure if same will apply for 100K SF office space, but I have been looking for 10K SF space.)

Our market might change with a decent amount of negative absorption in the office market with GE and Starwoods projected to move out of Fairfield County, so I do have some concerns buying now if office might get even softer here.

Shone Freeman · Answer

@Scott Trench, I have personally done this.  It was a very fortunate deal for me, and the seller.  I ran across a deal in a nice area and worked owner financing on a smaller  industrial building.  It was awesome, as I didn't have to pay for a commercial appraisal, no loan qualifying aside from basic financials and a personal financial statement.

I started by occupying less than half of the building.  Then as my business grew and my original tenant's lease expired, I took over the entire building.  13 years later, I am still there and praying for another one like that as we are running out of space!

Joel Owens · Answer

You can look at SBA loans but must occupy at least 51% of the total space as a general guide.

http://fogellawgroup.com/sba-loans-lending/faqs/

Daniel Raposo · Answer

I think this happens more often than you would think. I'm doing this right now with two properties I purchased last year, in one I will be renting out the main house and using the smaller detached garage/apartment for storage and office space and then in a mixed use multifamily building I bought about an hour away I am splitting off a small area of the retail space to use a real estate office for that area, while renting the rest out to stores. This strategy obviously make a lot of sense, as long as the numbers work.

"Commercial/Business Hacking" Instead of "House-Hacking"?

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