Everybody’s Business is Nobody’s Business

As a healthcare professional, a high probability exists that you now own, have owned, or will own a condominium. Most certainly you will be pitched the opportunity to buy one. Your condominium ownership might involve medical office space for your practice, a vacation unit elsewhere, or possibly student housing for a child attending college. While your experience as a condominium owner may provide years of enjoyment, yielding an attractive long-term investment in an appreciating asset, we commercial real estate professionals have seen first-hand the awkwardness, risks, litigation, and loss in property value that can occur when “Everybody’s Business is Nobody’s Business.” So instead of caveat emptor, we recommend, “Let the buyer be knowledgeable and informed.”

Who is in Control?

Answer: Not you. When you purchase a condominium, you become a minority owner willingly ceding control to the association, and its bylaws, in which you have a fractional voting interest. In a well-run condominium association of like-minded owners who get along, everything runs smoothly. However, unlike your personal residence where you pay the bills and call the shots on landscaping, maintenance and repairs, paint colors, and the selection of contractors and how to pay for them, you are one of many involved in the decision process. Trickier still are properties with only a few units, such as a medical office buildings, where one owner or alliance of owners ends up in a majority position and your role is relegated to writing checks with no say over the process.

In our experience, lack of control and the element of minority ownership, in many but not all cases, adversely impacts the marketability and value of an office building. We advise that prospective buyers of a condominium unit interview and interact with as many owners as possible before investing. You should attempt to determine if the association is well-run and functioning properly, as well as whether the fit is right, just as you would in assessing whether you wanted to practice medicine in partnership with others.

Who is the Manager?

Far too often in smaller condominium associations, an owner is forced to step up and act as resident due to dissatisfaction with, or mismanagement or even malfeasance by, a previous non-professional manager. No busy medical professional wants to take on the role of unpaid condo manager to protect a minority investment in a property. If a “manager” is unpaid, the other owners are getting exactly their money’s worth, and everyone is dissatisfied. Proper management is critical to making your ownership a rewarding experience and protecting the value of your investment. We recommend the following steps to evaluate management:

Is the association professionally managed by an outside company or by another unpaid owner?
How do current owners rate the quality of management?
Do owners regularly receive detailed financial reporting? What level of reserves exist?
Does the manager manage other commercial properties and employ full-time competent personnel, or is it just a part time gig?

Who Occupies the Unit?

Conflict often occurs in office building condominium associations among owner-occupants, who have a vested interest in maintaining a high-quality professional building, and absentee owners with units vacant or leased to outside parties. If even one tenant is not of the same professional nature as an owner-occupant, the nature of the property can be changed for the worse. Absent owners tend to be reluctant to put capital into the property and can have higher levels of delinquency in paying association fees. Since they are not on site, absent owners may care less about the appearance and operation of the property than does an owner/occupant. Two or more parties with different objectives can be problematic. Our experience is that office building condominiums in which the owners work on site are better managed and more attractive than when a high number of units are owned by absent owners.

We do not suggest that investing in a condominium is unwise. However, the inherent nature of divided ownership demands very careful assessment before purchase.

James Schrader is president of Schrader Commercial Properties, LLC, in Lexington.