One architect who has done this twice advises architects to plan for more room than they think they'll need. In 1995, John Carney, AIA, principal of Carney Architects in Jackson, Wyo., built a two-story commercial structure with room for a first-floor tenant. But within a few years, his business had grown beyond the dozen or so staff he had anticipated. Carney sold the building and designed another one downtown, on property he bought from a client. His current digs include 4,500 square feet of workspace, plus 1,500 square feet of tenant space. Now that the staff roster has doubled, he plans to take over a 500-square-foot tenant lease that's set to expire shortly. To execute the project, “We created an ownership entity outside the firm, and my kids own a piece of it,” he says. “Eventually I'm hoping my partners will too. I think owning a building is about ensuring the ongoing nature of the firm and having this great building that people become vested in.”footing the bill
When you analyze the potential payoff, buying might seem like a no-brainer. But until the dust settles, financing that first building can be frightening. For some, like Maurice Lombardo, AIA, a principal of Taylor Lombardo Architects, getting a foot in the door takes creativity and a high threshold for risk. Lombardo had all but given up on San Francisco's outrageous real estate prices when a broker friend told him about an 11,000-square-foot building on the market for $3.2 million. Its location near the Transamerica Pyramid was perfect, and a restaurant was renting the ground floor. But the three stories above it needed work, and Lombardo couldn't swing the remodel. So instead, the broker suggested a lease-to-own option.
After negotiating a price of $2.775 million, “we put an offer together to lease with an option to purchase in 18 months, using Small Business Administration loans,” Lombardo says. That arrangement locked in the purchase price but would have allowed the firm to sell it for a higher (or lower) price when the lease was up, had they failed to qualify for the loan. Meanwhile, he and partner Tom Taylor, AIA, refinanced their homes to pay for a $500,000 remodel of the top two floors—money that counted as a down payment. “It was extremely risky to remodel without owning it, but it was the only way we could do it,” Lombardo says. “We moved in on the third floor and had debris falling in our coffee mugs, but we couldn't afford to pay two rents.” In November 2004, with the remodel completed, the firm applied for and received an SBA loan (see sidebar). The loan required that it put 10 percent down and occupy 50 percent of the building.
Lombardo says the building's tenant income, including the $10,000 per month his firm pays for use of the third and fourth floors, covers the building's costs. “The rent is about the same as we paid before, but it comes out to be a lot less once you put it all together,” Lombardo explains. “It's a nice way for architects to create a forced savings plan, and it's much better than a 401(k), because you get to use it.”
When it comes to financing, other architects swear by the good will they've garnered with local banks. “We've been giving a local bank here in Omaha, Neb., all of our business—private, commercial, and residential accounts—and that was a really wise move,” says Randy Brown, FAIA, principal of Randy Brown Architects, who also owns Quantum Quality Real Estate, a development firm. “We could sometimes get better rates, and the bank will sometimes finance things before we are 50 percent pre-leased.” In 1999 the development company —Brown plus two partners —went to work on a 10,000-square-foot office building to house the two entities, borrowing 90 percent of its estimated value. “It was a million-dollar investment, plus the cost of the land,” says Brown, who has 14 employees. “We brought the building in at $100 a square foot.”
A $1.2 million retail phase followed in 2002. Brown says the 8,000-square-foot addition was 50 percent pre-leased and 100 percent bank-financed. Four years later, the building achieves a positive cash flow, including the roughly $50,000 a year his architecture firm puts into the pot. It's another example of architects using their design/build expertise to add value as property owners. “I don't see a lot of risk because, at the end of the day, you've built something that can be sold,” he says. “For me, that was the fallback.”
Another cost-efficient option is to buy or build in a redevelopment zone. Vetter Denk Architects is receiving tax credits and low-interest loans to design a commanding commercial building that will house the practice in an up-and-coming part of downtown Milwaukee. After winning an RFP competition, John Vetter, AIA, and partner, Kelly Denk, AIA, created a separate development entity to purchase the $145,000 lot and hired their architecture firm to design a four-story building, valued at $4.5 million. “The city's interest is in creating business opportunities and a tax base, so they're not out to get top dollar,” Vetter says.
Still, the partners spent a year trying to make the project work financially. Originally, they'd hoped to include residential lofts but abandoned those plans in order to qualify for two loan programs geared toward retail commercial. When the building is finished this year, it will include a street-level retail space and three floors of offices, plus a built-out basement and a common-use rooftop pavilion.portfolio power
The flexibility of small firms makes space options even more interesting. In a modern riff on the classic cottage industry, some architects have designed snazzy studios where they live. Christopher Hays, AIA, and Allison Ewing, AIA, LEED AP, the principals of Hays + Ewing Design Studio, Charlottesville, Va., work in a detached studio with their master bedroom above, which connects to the house via a second-story bridge. “We imagined that it would be strategic to have a space we could rent out as a separate unit” or devote to an aging parent, Ewing says. “We usually show people our house as a portfolio project, so the studio has been a good thing. The space shows a quality of life that pictures don't convey.”
In Berkeley, Calif., Sheahan + Quandt Architects principals Patrick Sheahan and Cathleen Quandt teamed with two other professionals to develop a rare sliver of land that's zoned as residential/commercial. They paid cash for the land, and each used a third of the equity to create live/work spaces for themselves [see our coverage on page 104 of the January/February 2007 issue]. The couple can write off depreciation on the 40 percent of the building they use for business, and lowering their personal taxes frees up money to pay down the loan. “When it's an investment in both your business and your personal life, there's a different financial dynamic,” Sheahan says. “Everything is at stake, but you have everything to gain.”