The last decade's blistering real estate performance has rather painfully separated the owners from the renters—the clear winners being those who staked out a property or two on the proverbial boardwalk. As the tide turns, real estate prices are no longer “guaranteed” to go up, and no one knows precisely what lies ahead. But for successful architects with growing practices, owning the space in which they work is almost always a smart business move. It's a way to escape the whims of the rental market while reaping substantial tax benefits. It's a formula for controlling your destiny: Purchase more square footage than you need, lease the surplus, and grow into the extra space as tenant contracts expire. A building that exemplifies your design talent is also great PR—and a sound retirement strategy. Architects often make more money on the sale of their office building than on the sale of their business when they stop working, says Jacklyn Jordan, president and CEO of Capital Access Group, San Francisco.
Coming up with a down payment on commercial headquarters can be tough, however—especially for architects with small- to medium-size practices. Owners of startups struggle to take home a decent salary, and mid-career architects are folding the profits back into their business. The costs may be out of reach for those who work in exclusive vacation enclaves too. Just ask Mark Hutker, AIA, who has two offices. One is on Martha's Vineyard, where he owns a spacious suite in a 20,000-square-foot mixed-use waterfront building. The other is in Falmouth, Mass., where he rents prime space in a former restaurant —also on the water—that his firm recently adapted as offices for a local client. “At least three of our clients have come to design meetings in their Hinckley picnic boats,” Hutker explains. “We lease the Falmouth office because there's a lot of cachet we wouldn't otherwise be able to afford. The cost to own would be prohibitive.”
Like the first commission, the first employee, the first partner, buying office space is one of the big milestones. Whether ownership status is the result of serendipitous events or research and calculated risk, it is born out of need, desire, and creativity as architects' fortunes, along with their neighborhoods, begin to change. For Hutker, ownership of the Vineyard office was originally a case of being in the right place at the right time. In 1984, just as the building was being completed, he was invited to form a partnership with the developer, who worked out of one of the condo units. When Hutker spun off the architecture wing of the business a few years later, he purchased that unit, expanding to three adjoining condos over the next 20 years as his bank accounts allowed.long-term leverage
As they look to the future, many savvy architects go the landlord route, choosing a location that will attract good tenants who deliver a steady stream of rental income. When Darrel Rippeteau, AIA, set up his practice in Washington, D.C., in 1978, “if I did have a long-term vision, it was to own real estate,” he says. In 1986 he and his wife, Judy, borrowed money to purchase a “crummy little building,” a remnant one-story warehouse used to store hot dog-vendor carts at night. After doing basic repairs, Rippeteau Architects moved in, paying rent to the Rippeteaus, who also leased part of the parking lot to a neighbor. It was a gritty block back then. But Rippeteau couldn't help noticing, as he rollerskated to work, that the neighborhood's dangers were “vastly overstated and over-reported.” Sure enough, by 2002, real estate values were on the rise and, with the loan paid off, he considered cashing in. But when Whole Foods and other upscale businesses began investing nearby, he decided to use the equity to design a mixed-use building on par with the emerging neighborhood.
In the new iteration, street-level retail space is occupied by gallery plan b, an art gallery for established and emerging local talent. Rippeteau Architects is on the second floor, and a third floor houses two 900-square-foot rental apartments with double-height living spaces and outdoor terraces. “My wife and I got an inflatable mattress and stayed overnight in each one just to get the experience,” he says. “We would have moved in in a minute. Because we had to borrow money, part of our business plan was that we would sell our house and move in if we had to.”
Rippeteau was fairly sure of the commercial component. But with the city's recent condo explosion, he was less certain he could fill the apartments. He tried to capture the discriminating renter by making them theatrical and arty, appealing to people who've made their major investment elsewhere but want to have a foot in D.C. “We've leased to people who are happy to have a stylish, urbane place with their car parked out back,” Rippeteau says.
If there's one bit of advice to offer, he says, it's this: be certain about your leasing—as certain as you can be. “When I bought this property initially, I knew that, as a tenant, I could make the rent and pay down the loan. And I knew that when I redeveloped it, the strength of my business would carry this deal,” he explains. “I just needed to design something that would attract one or two other tenants. But as an investment strategy, knowing that I was going to build something my architecture firm would pay rent to is a powerful part of why it works for me.”
Indeed, as business owners and design-and-construction experts, architects are uniquely positioned to leverage their real estate assets long-term. Through creative financing and some sweat equity, Geoffrey T. Prentiss, AIA, found a spot for his staff of seven in a pricey Seattle neighborhood [see our coverage on page 70 of the January/February 2007 issue]. Prentiss was working out of his home for 12 years and bursting at the seams when he began renting space a few blocks away, in a building owned by a friend. After the owner abandoned plans to redevelop the property in 2003, Prentiss bought it for $485,000. He put $100,000 down, financing the rest with a five-year balloon loan from the owner. The monthly mortgage worked out to be just slightly more than he'd been paying in rent.
But Prentiss didn't stop there. Over the next 18 months, he completed a renovation and 3,000-square-foot addition that comprises, in total, two commercial first-floor units and two apartments above. “It was a good hands-on experience,” Prentiss says of the project. “I made sure everyone in the office took responsibility for a section and made it their job to deal with the subcontractors.” One commercial unit houses his studio; the other is occupied by an organic coffeehouse on a 10-year lease.
To pay for the $600,000 project, Prentiss refinanced his house, getting an interest rate two points lower than he would have paid on a commercial loan. As planned, his income from the building covers the $10,000 monthly mortgage. “The first year was a little bit of gritting the teeth,” he admits. “You still have this big thing leaning against you, and you have to gamble that things are going to stay relatively steady. But this is where architects will get ahead, using the wisdom we've gained in contracting to do something ourselves.”