Blue Dirt
Blue Dirt: Commercial Property Investing delivers expert insights and strategies for building and managing a successful commercial real estate portfolio. Whether you're a seasoned investor or just starting out, this podcast uncovers market trends, financing tips, and key investment principles to help you thrive in the industry.
Blue Dirt
Navigating Condo Ownership in Commercial Real Estate
Dive deep into the world of commercial office condos as we share our journey of acquiring and transforming four medical office units on a hospital campus. What began as a straightforward investment quickly turned into a crash course in HOA politics, property improvement negotiations, and the delicate balance of building relationships with long-established owners.
When cast iron plumbing pipes started failing—pipes that weren't even servicing our units but were located above our ceiling—we faced our first major test in navigating shared responsibilities. The initial resistance from the condo association highlighted a crucial lesson for commercial condo investors: understanding governance documents thoroughly is essential, but knowing how to leverage them effectively is an art.
We take you through our transformation process—from dated, 40-year-old medical offices to modern, fully-leased spaces generating robust returns. Learn how we managed a complete renovation while simultaneously marketing the spaces, securing three tenants on triple-net leases before even closing on the property. This strategic approach allowed us to turn a $400,000 purchase into a $751,000 asset in just two years, representing a 50% increase in value.
Perhaps most valuable are the insights we share about influencing positive change within a bureaucratic structure. By gaining board positions, building one-on-one relationships with other owners, and demonstrating expertise in property management, we gradually shifted the association's approach to maintenance and improvements.
For investors considering commercial condos, this episode offers both encouragement and caution. While the financial returns can be exceptional and the management surprisingly hands-off (thanks to the HOA handling common areas), the pace of change and decision-making operates on a different timeline than wholly-owned properties. Success requires patience, relationship building, and sometimes the willingness to say, "We'll fix it now and figure out who pays later."
Subscribe to Blue Dirt for more episodes that dig beneath the surface of commercial real estate investing to uncover the foundational principles of building lasting value. Got questions about commercial condos or other investment strategies? Reach out—we'd love to hear from you!
Learn more about Blue Commercial Properties on our website.
Welcome to Blue Dirt, the podcast that digs deep into the foundation of commercial real estate investing. Unlike most real estate shows that focus on dealmaking and market trends. Blue Dirt gets into the nuts and bolts of what truly builds long-term value the building itself. We break down how to spot deferred maintenance before it costs you, why a solid preventative maintenance program is a game changer and how triple net leases can maximize your investment returns. We'll also explore the importance of strong landlord-tenant relationships and how they drive stability and growth in your portfolio. Whether you're a seasoned investor or just getting started, Blue Dirt gives you the practical knowledge to make smarter, more profitable decisions in commercial real estate. It's time to get your hands dirty and build value from the ground up. Let's dig in. Welcome to the Blue Dirt podcast, where even idiots can make a killing in commercial real estate. Today, Don and I are going to talk about the two questions we want to answer what is a condo as it relates to commercial real estate? And then, how do you navigate the HOA owners to improve that property?
Don Redhead:That's a great question. I don't feel like I have a good answer.
Michael Carro:Well, we may not have good answers, but we have experience and we can at least share our experience with you. So here's the setup. So, first of all, how did we come across this asset? I was working with a few ladies that wanted to break off on their own and start an esthetician type business where they're doing injectables and you know health and beauty. So we were looking at different properties and they actually discovered this property. It was a doctor that owned these four medical office condos right on the property of one of our major hospitals in Pensacola. So, from my perspective, great location. And I had always I share with people that listen. If you find something that you like and you can't afford it, we can buy it and lease it back to you, or we can always outfit a variety of ways to make it work for you if that's what you so deem necessary. So, anyways. So these ladies actually knew this doctor and knew that she was about to retire. She's been in the same building for 40 years. Kind of impressive.
Don Redhead:Yeah, yeah, and you can see the evolution when you got in there, where they had started in one place and how it had kind of evolved. So, yeah, they had been in there a while, got to talk a little closer so can you hear me now?
Michael Carro:no, I can't, you can't, you still can't. No, it still can't. But that's okay. Um, you don't want to hear. So, anyways, I reach out to the doctor and, uh, uh, went and saw the property personally. I loved it. Now donald talked to you a little bit about what physically it looked like and everything else, but from a pure dollars and cents standpoint made sense. So what was really interesting about this property is I'm pretty excited about it and I'm trying to reach back out to these ladies because it was their deal. It wasn't mine and they ghosted me, wasn't mine and they ghosted me. So I still go through the process and we get it under contract, still expecting them to come back. And as we're getting closer to the end, they vanished, which is fine because from our perspective, it's still an investment property and it made sense. But you know I always want to show them the courtesy because this was their deal, yeah, so anyways. So we went in and ended up getting a new contract ultimately closed.
Don Redhead:But before we dive into some of the other things. Tell us what you saw when you first went to that property. Just overall, was wasn't well maintained. I think the, the space that we were in was really indicative of the whole place it was. It was kind of that past its heyday they they really stopped putting any real money into the asset. It it feels like probably 10 or 15 years. They at least had put in, uh, a new roof on it, which was nice, but but we had light fixtures hanging kind of around the canopy.
Michael Carro:Let me go back one second. So this happened to be in a medical office condo it was two stories and so we had never bought into an office building. That was a condo. So I had a lot of questions. I'm reviewing the documents, not really sure how things work, so I'm not afraid of it.
Don Redhead:I just didn't understand it and so we usually like to control the asset, so it's not in our wheelhouse to be kind of beholden to to other decision makers and having to play well, in that same sandbox. So, yeah, usually it's ours, we're going to control it and see and do what we want to do with it, which we like to improve. So we don't want to be, you know, slowed down or have to go through any of those other processes.
Michael Carro:So he's talking about bureaucracy and having to play well with others. We can, but we we kind of move at mock speed. When this entire building 11 units and we were buying four of those 11 units, it needed a lot of love and a lot of updating, and so one of the things that we really were focused on is in reading the documents how does the voting work? Because we need to understand that, because we want to vote to keep improving this building. We know that as new owners in this building, we were going to have to pull money out of our own pocket towards the HOA to make these improvements, which we were willing to do. But we're only four elevenths of the vote, so we still needed to figure out how that worked.
Michael Carro:So I'm reviewing the documents and everything else and it's kind of interesting. We ultimately got through a lot of that, but but there was a little bit of now, just to back up, these are medical office condos, so there are restrictions on this property that it has to be medically related. Now there was some loose language on the type of medical, so you could still be like a counselor, a psychiatrist, a dentist, an esthetician. You know health and wellness hearing. You know anything related to the body and the mind was considered in this, in these condo documents?
Michael Carro:Those were, but you could not put in, you know, clothing boutique or whatever Right, right, you couldn't put you know clothing boutique or whatever, right, right, you couldn't put in a clothing boutique or things, maybe a light kind, so anyways, uh, so, as long as you understand what you're getting into and, quite honestly, that also helps to protect the asset from a lot of randomness, okay, so so we knew what we were buying into. Well, we got pretty lucky. So, while we're under contract and this is not uncommon we actually started to market the property and three of the four spaces we leased out before we closed them. So, we're high-fiving each other.
Don Redhead:Now one took two spaces, didn't they Right? Yeah, yeah, so we're 100%, essentially at least, going into closing. Yeah, so now one took two spaces, didn't they Right?
Michael Carro:Yeah, yeah. So we're a hundred percent, essentially at least going into closing Right. So well, no, uh, I'm saying three of the four spaces released, the last one, it took us another six months.
Don Redhead:Oh, okay, yeah.
Michael Carro:Yeah, so, but, but Don, why don't you talk a little bit about the condition of the property and some of the challenges that we ran into right away, especially as it related to dealing with the HOA? Yeah, overall.
Don Redhead:on the surface, right as we got in it, it everything appears to be of the normal, just dated right. Old floors, needs paint, needs some new fixtures in there, but. But everything pretty simple. And we get probably three quarters of the way into this project and all of a sudden one of the last things you do right before you turn over a space like this, especially this dated is we put in all new ceiling tiles and we started noticing that these ceiling tiles are just getting soaked and they are like what's this coming from? Is there some kind of roof leaks happening? Is there HVAC? And lo and behold, all of the sewer lines that were feeding the second floor units because our units are on the first floor had all kinds of channel rot. All of these cast iron pipes were all rusted out from the inside out now the interesting thing is is none of these pipes were for our units.
Michael Carro:like don said, this is all for the second floor, so we don't know how this works, because you know, if we have a plumbing issue in our units, you know, we understand that we would have to pay for those, but this is affecting our unit but it's not for our unit.
Don Redhead:Correct and initially, I don't think they had quite the understanding of it either. The HOA and we're like, hey, this, this, after reviewing the guidance, because that's that's really the first thing you need to do is, hey, I think this is a common area issue. Right, there are pipes, there are sewer lines feeding the second floor units not anything to do with ours. And okay, let's go to the condo docs. What's it saying? Okay, it is saying that anything beyond the fixture is the association's responsibility to fix. So we go. Hey, you know, we have all these issues right now. You guys got to look at this and for some reason it was. It was in their minds that no, that's yours, it's inside your, it's inside your space. Technically it is inside our space, but it really isn't right Cause it's it's above our ceiling but below their, their decking and hold on.
Michael Carro:This is where I can be a jerk. Oh, it's my responsibility. How about I cap all these drains, you?
Don Redhead:know you had to get there.
Michael Carro:I don't need to replace these drains that actually don't service me, so don't push me.
Don Redhead:No, and we, we have to cap everything, and that was great, because you go and you try to be. It's hard to at least I'll say our style, my style. It's hard to at least I'll say our style, my style. It's hard to go backwards.
Don Redhead:You always want to go into the situation with a little bit of a hey, this is what we're dealing with and see who the reasonable parties are that step up and and want to weigh in and help, but they, for some reason, would not move and would not budge. And hey, this needs to. Hey, this needs to be addressed, this needs to be addressed, this needs to be addressed. And it got very confrontational very quickly with hey, just so you guys know we're about to cap this plumbing and then it pivoted. It was, I think, a realization there as well, as we're going to start fixing things and you're going to pay for it. That was the next step. After that, it was once they still were slow playing it and I just don't know if they weren't fully understanding it getting in I we're dealing with who moved my cheese type people, this property manager, you know, they just move at a snail's pace and we we have vacancy is the enemy of landlords.
Michael Carro:Here we have three of our four spaces leased up and we have the ability to deliver it in a very timely fashion because we don't stop. Well, they want to slow it down, spend weeks analyzing and we're like well, this will take three days to fix and so Especially when it's vacant.
Don Redhead:We don't even have somebody in there, yet we want to get all this done while it's vacant.
Michael Carro:The last thing we want are sewer drains above our tenants having issues. So we just say you know what? Screw it. Replace what needs to be replaced. We'll worry about who pays for it later, because we need to bring our our spaces into, into a functionality. So so all that to be said is so there's this bureaucracy in this condo association that we were not accustomed to and they weren't accustomed to us.
Don Redhead:Or they weren't accustomed to us Right.
Michael Carro:And and so, and I think that there was a lot of gray area, and we also had, you know, we're dealing with, uh, other doctors that have been owners for such a long time. Sometimes, when you own a space for a long time, you somehow think that your value of ownership, because you've owned it longer, is somehow greater than somebody else's. And I don't care if I buy it today, I'm still a full-fledged owner right now. I'm equal to you, regardless of whether I own it a day or 10 years, it does not matter. You may have more tribal knowledge, but we still have the same rights, and so so we had to go in there. Now I will tell you I'll fast forward how long have we had this?
Don Redhead:uh, oh, I can tell you, two years we bought it in. Uh, uh, oh, I can tell you.
Michael Carro:Probably two years, two and a half years. We bought it in May 25th. Oh goodness, happy anniversary 2023,. Yes, we are two days short of it.
Michael Carro:Two days short of our second year anniversary. Now I will tell you that, while it started off with some contention, we built a lot of bridges with our partners in the HOA. They're great people and over the past two years we've made a lot of improvements to the building. They all are now taking, I think, a greater pride of ownership. They're willing to put their money where their mouth is and improve the space. We're not getting everything that we want, but that's okay. We have to be. We have to be good partners to them as well.
Michael Carro:And while Don and I always want to improve and make it the best it can be, we understand that everybody has a budget and so we've got to work on that. And you know, we even had to go through a process of we had one of these one doctor that was in default on his HOA fees and it was getting worse and worse and worse. And I just stepped up and said you know, sorry guys, I'm not because I got on the board and I said I'm not comfortable with extending more credit. You know, if he can't afford to be here, then he maybe should sell the unit. If he can't afford to be here, then he maybe should sell the unit, and he ultimately did, and one of the other doctors in the building ended up buying his space out, and he's going to put that on the market for lease as well.
Michael Carro:So, but anyways, all that to be said, over the past two years we've made a lot of improvements to the building. It's now looking better. In fact, this week we just approved that the lighting that Don said has been hanging down. We just got some new lighting approved that'll be installed over the next couple of weeks. Everything moves a lot slower than Don and I are used to, but that's okay. We're working within a new system, and so that's probably the biggest thing I wanted to share from an HOA standpoint is, you know, just make sure you understand that document, build bridges, get on the board, help the decision process is probably one of the one of the biggest things. So you want to talk about some of the other issues you had.
Don Redhead:Yeah, and I think you did touch on something that maybe didn't it didn't fully set into me, kind of when it was happening was, like you said, it was really in this kind of gray area that I think that this, this board or these owners, like you were saying, had been there for so long. They just had never been, uh, approached with this kind of problem so they really didn't know how to react to it. And then, as you're saying, building bridges. I think now the board really looks at us for a lot more guidance than, I think, when we first stepped into the fray.
Michael Carro:A lot of times they're kind of always double checking, I think we've earned a little bit of their I don't want to use the term respect. I do think we have a mutual understanding that you know one thing that Don and I are good at are these buildings. What they're good at is taking care of patients. What Don's great at is taking care of buildings. And so now we just are more collaborative in our efforts to hey, listen, we're here to improve your assets that you own, including our assets that we own. We're here to improve those. We're not here to fight, we're here to lift all of our values in our asset.
Don Redhead:Correct, and I think it was maybe six months or a year ago now. We had sat in, or I had sat in a meeting and they're talking about replacing certain other sections of plumbing because now they're on the trajectory to replace all the cast iron and replace it in its current condition and position and location, and the buyer of those units you were just talking about was divulging during that meeting hey, I'm going to renovate the space and change the layout, right. So I shared. I was like hey, just so you know, if you do that, the first phase, right, the repairs, the replacement, and then you change the location, it changes the whole equation and you're going to be back in there again, which you know. We have to step in and sit there on behalf of the tenants as well, to where they would be back into our tenant space making a messfully saying guys, this is the right time when we don't have tenants in these spaces, this is the right time to replace all of this bad plumbing.
Michael Carro:And they would not have it at that time, of course. Now our tenants are moved in and now we have to be more sensitive. So when you, when you have vacant spaces, boy, that's a great time to fix everything. So when you, when you have vacant spaces, boy, that's a great time to fix everything. And but they just but. Again, we didn't have the credibility and they didn't know us. So I think that you know, probably worked to our disadvantage, but what Don ended up doing is all of these spaces were just dated. He went in and redid all the painting, all the flooring, the ceiling tiles, really just updated the space, took a wall down, added a wall where it made sense and just made it more functional space. So I'm going to talk about some of the financials, are we?
Don Redhead:done. On the quick and dirty HOA. Yeah, I think the only other thing I would say that I think also was beneficial was reaching out kind of one on one. I know we've reached out to the, the larger group that has medical office there, a professional group, and it's just like anything with with bureaucracy having good one on one relationships. It builds that rapport and allows you to get some things done that you may have ran into challenges.
Michael Carro:Right? Well, in fact, I'm going to touch on that in just a moment, so I'm going to run through the financials of this asset Again. We're celebrating our two-year anniversary in two days. So the purchase price was, we thought, pretty good. We didn't negotiate this. This is what the owner asked for and this is what we agreed to. So it was $400,000. We put an earnest money deposit of $10,000 down, we had a 60-day due diligence and another 30 days to close.
Michael Carro:The total square footage of these four units was 5,450 square feet. That's, don invested $16,225 in plumbing repairs and we also spent another $83,000 in overall upgrades. So we had about $100,000 in investment. We were able to secure three tenants for all four spaces. Secure three tenants for all four spaces. The base rent on all of those combined is around $96,000. The purchase price on a square foot basis was $73 a square foot. We put another $18 a square foot in renovation, so our investment was $92 a square foot. The NOI is $61,476.
Michael Carro:The cash on cash for this property was pretty robust because, you know, it's about 100%. It was pretty dang good. So, as of today, we believe the value of this property to be $751,000, which is $137 a square foot. That's a $46 a square foot increase over our total investment. That's a dollar increase over the last two years of $252,000. The last two years of $252,000 and an increase of 50.55% from when we bought it, plus the cost of renovation. So for a very short term, this is a wildly successful property. It doesn't mean that we have taken any distributions yet. Have we taken distributions on this property?
Don Redhead:uh, I think we took one okay so yeah, towards the end of the year we?
Michael Carro:we typically wait till um later on in the third year to make our distributions, but it's going pretty good. But what we um what we want to do is we've got a good cushion in the bank account because if the hoa makes uh decides to approve more improvements, we want to always step up and not do a capital call.
Don Redhead:Which they have. Yeah, like we talked about, they started doing the additional plumbing. They've done some painting the lighting, so I mean they're doing it. So, yeah, we're reinvesting.
Michael Carro:Yeah, so we always have a slush fund ready to go and be deployed into the space. We've got three really good tenants. They all signed I think they all signed five-year leases, and so we couldn't be happier with this asset Again. It sits right on the campus of a hospital. The hospital itself owns two of the units, one of the doctors owns three of the. The hospital itself owns two of the units, one of the doctors owns three of the units. We own four of the units and the other ones are owned by individuals. So it's been a learning curve and, I think, a very positive situation for us as investors, and I think I've enjoyed the process.
Don Redhead:Yeah, that one I've wasn't initially very, very frustrating, but I think now that that things have settled down, it's it's honestly probably one of my favorites that we have. It's it's relatively quiet. I think the design of an HOA type building lends itself to be easier for us to manage. I know that because of the way things are metered, because of access they're all designed to where individuals can kind of sustain on their own. Why?
Michael Carro:don't you talk about that, Don? So what does the HOA pay and manage versus what you have to do as a property manager for our tenants?
Don Redhead:What do they take care? Really? Because they're triple net leases, they almost take care of everything. So the HOA, specifically the HOA so they're taking care of the common area lighting. They're taking care of the common area lighting. They're taking care of the common area cleaning as well, if there is any roof issues, which we really haven't seen anything any of the exterior improvements and then the accounting for the common area, because there's a common area house panel for the lighting and so on.
Don Redhead:If there's any landscaping issues, you know, irrigation, all those things that typically are more, uh, even in triple net properties where we've we've had multiple tenants, we play a very active role. We're playing this kind of uh, just, you know, hands-off approach because the HOA is managing, typically, what we take care of and the tenants, because they're triple net, they're responsible for anything inside the units. So we, we at this point, are really providing a more of a guidance, like you said, that that we've evolved into and you know, as part of being owners as well. Yeah, so that's why I think it's probably one of my favorites, the lending on this was 75% loan to value.
Michael Carro:We had a pretty darn good interest rate at 6.1%, 20-year amortization, five-year term. So our mortgage payment on this property is $34,668 a year and of course, our annual rent is a triple net is $96,143. Our NOI is $ 61,000 and change. So not a bad, not a bad asset. So every, every year, basically, we collect an extra $61,000 over our mortgage payment and then you know, we keep so much of that for improvements to the asset and then the rest we now distribute once we have our base. So that that's, that's kind of the long and the short of that property. It's been really, really nice and it's a great location within pensacola yeah, that's long-term location.
Don Redhead:I mean fantastic, um, and one thing that is a little bit of a benefit to us only from a cash flow management standpoint. We don't like like you're touching on how things move a little bit slower, but it does make it a little bit easier for budgeting because we we can forecast that hey, they're going to be planning to make these repairs and then it takes them longer to make the repairs we usually spend money before we have it.
Michael Carro:Um, we, uh, we, uh. We are definitely fire aim ready type guys. Um, the asset always comes first and I'll figure out, even if I've got to loan the company money. Um, I don't, I don't like things to sit. Our, our, we believe our tenants deserve a good asset. If they're paying rent, they deserve to get the asset that we agreed to deliver to them. And so, uh, and it also, uh, allows us typically to have less vacancy, and if we can have high occupancy and low vacancy, that is where we win as landlords. Yeah, absolutely All right.
Michael Carro:Well, that wraps up another episode of Blue Dirt, where even idiots can make a killing in commercial real estate. Thank you, that's a wrap for this episode of Blue Dirt. We're here to help you build smarter, invest wiser and create long-term value in commercial real estate, one solid foundation at a time. If you found today's insights useful, be sure to subscribe so you never miss an episode, and if you know somebody who could benefit from these discussions, share Blue Dirt with them. Got questions or topics you'd like us to cover? Reach out. We'd love to hear from you. Until next time, keep digging deep, stay sharp and remember real value is built from the ground up. See you on the next episode.
