How To Turn A Multi-Tenant Property Into Sellable Units

One legal change can reshape the entire value of a commercial property. We get very specific about a strategy we’re actively using: converting a multi-tenant building into commercial condo units you can sell separately while keeping shared areas under an HOA. If you’ve ever wondered whether the sum of the parts can be worth more than the whole, this conversation gives you a real-world framework, not a theory from a textbook.

We start with a simple warehouse example where each building becomes its own condo unit and the land and common areas roll into association ownership. Then we move into the bigger challenge: a professional office building with 26 suites, uneven unit sizes, and years of deferred maintenance that had to be corrected before the asset could stabilize. We talk about the condo conversion process step-by-step, including why the survey is slow and expensive, how attorneys assemble the declaration and condominium documents, and what has to happen before units can be individually deeded and sold.

We also dig into the business case: tenant demand for ownership, why smaller spaces often sell at a higher price per square foot, and how we’re thinking about marketing vacant suites first. You’ll hear how seller financing can create a win-win for tenants and owners, plus the non-negotiables with banks, lender consent, and debt service coverage ratio limits that can affect how many units you can sell and what you do with the proceeds.

If you’re serious about commercial real estate investing, value-add strategies, and practical ways to build long-term value, subscribe, share Blue Dirt with a friend, and leave a review with your biggest question about condo conversions.

Learn more about Blue Commercial Properties on our website.

Transcript

Blue Dirt And Today’s Focus

Michael Carro 0:00

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 deal making 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 another edition of the Blue Dirt Podcast, where even idiots can make a killing at commercial real estate. I'm Michael Carroll with SVN Southland Commercial Real Estate. And I'm with Don Rudhead with Blue Commercial Properties. Fantastic. So today we thought we'd talk about something that we've been having fun with. We are in the process. So any building that you have that is multi-tenant, um, I think has the ability to become a condo. Now, we often think about a condominium as, you know, a residential situation, which absolutely happens with an HOA in common area elements that are shared ownership with the HOA. And so several years ago, I had three uh warehouses uh on one property. I had the original one that I built and then, I'm sorry, that I bought, and then I built two more. Um, and three of them were on the same piece of land. Well, over the years, one of my tenants asked if he could buy that. And I said, hey, listen, of course, we'll figure it out. And that's when I learned that we can do a condo. And in this case, it's a little bit different. Uh, there's three condos. So each building has a zero lot line, so it doesn't extend beyond the building itself. And all of the other area is considered common area that's owned by the HOA. And each person or each owner has their prorata share of ownership into that HOA. Simple, straightforward. It worked out really great. We still own two of those warehouses. That other person still owns that third warehouse. Works out really, really well. And and like a triple net, it's really an HOA expense for the individual owners. So, fast forward, we purchased um a place called Midtown Professional Building. When did we do that?

Don Redhead 2:47

Was it four years ago, three years ago? No.

Surveys And Condo Documents Timeline

Michael Carro 2:50

No, it's about almost five, I guess. Oh, time flags. Four or five years ago. So I think we got a good price on it, but it was a property that was hemorrhaging cash. Uh, it had been horribly neglected. Uh Don has spent he spent the first two years. Again, we bought it for a good price, but it was losing about$100,000 a year. And uh we allocated a certain amount of money in renovation costs when we bought the property. We probably allocated maybe what, five, six hundred thousand. Yeah, it was it was pretty high. Okay. So we allocated, let's say, five hundred thousand. Um it's in a it was it was in an area of town that I knew within five years it would be a it would be solid in and because I could see where our community was growing. And uh, but in the second year, I think you spent another 500,000 as well. But it's taking a lot of but it was spent out of cash flow. So so we really turned it around. We spent a lot of money rehabbing a space, um, uh filling it, rehabbing a space, filling it. So, you know, so all the work that Don did allowed me to then lease out the space. Okay. And in this particular building, there's 20, I think there's 26 individual office spaces. Um uh some spaces are 500 square feet, some spaces are 5,000 square feet. So they kind of vary. Uh, but if we'd say this sweet spot is two to three thousand, we'd probably be probably be close. Okay. So um I had the idea to condo that. And I had never done a building like this. And so I approached um a really good condominium condominium attorney in Pensacola, uh, Moorhead Law Firm. They just do a great job with condominiums, Stephen Moorhead. And I said, hey, listen, what do I have to do? And uh so he recommended I go get uh hire a surveyor, which we did. And then the surveyor, it was a really intricate process. They have to measure every single space within the condom within the building, and then we allocate what space is with what unit. So it's really it was kind of funky, you know? And um, so that took them uh months. It wasn't it wasn't like a normal survey where they can go do it in a week or two. I mean, it this took months of time and and it was pretty expensive. I would say, I don't know,$25,000 for the survey.

Don Redhead 5:23

I don't remember.

Selling Units With Lender Rules

Michael Carro 5:24

Yeah, for the survey. And then so once that was done, we kept meeting with the attorney, and then they kept building this condominium documents. And so now we're finally at a point where I could literally go out and sell the each of the 26 units separately. Now I haven't I haven't put them on the market yet. Um, but the theory that I have is this. And so we'll have to have a follow-up episode to see if it worked. Um, but the theory is kind of like when you break out a car, if you sold every part of a car, it might be worth$100,000. But if you sold the car in in totality, it might be worth$50,000. But the individual parts are worth more if you have if you have an outlet for them, of course, um, than the than the sum of the part than the sum. So um, so that's kind of the theory. And so, but because we bought it at a good price and because we've now loved on it, um, and by the way, I don't have any expectation that we're gonna sell all 26 units. Right? I mean, so if I sold five, great. If I sold 10, fantastic. But I always have an expectation to probably always own 50% of these units. And so, um, but what what are the benefits? Well, the benefits, um, and by the way, I'm gonna offer seller financing. So if somebody wants, if one of my existing tenants wants to own, thrilled with with selling it to them and and we will own or finance it. Now, I've already spoken with the bank. You can't just do something like this without your lender who is your partner, uh, if you have a lender. Um, and our our bank was all about it. They loved the idea because it told them, I said, hey, listen, if I sell it, I can give you the money. It I can keep the money. It really doesn't matter. And they were like, no, no, no, we don't want you to pay us off. We will we want to continue to uh have that loan with you. So um, but at the same time, we always have to make sure that the ratios, uh, the debt service coverage ratios are always in check. And so let's say I sold three. Well, they might say, hey, listen, that third one, you got to give us that money because uh you're off of your ratios. So um, so I'm kind of excited about the process. Uh Don, what what are your thoughts so far about what we've been working on?

Tenant Demand And Go-To-Market Plan

Don Redhead 7:37

Yeah, if you've kind of been running point with that. So it's it's I've been in the dark. I'll say more. It's just kind of seemed like a pet project that you've been working on. Um where did you kind of was it history that kind of popped into your mind with Fowler? How did you how did you come up with the want to do it there or the or the desire or the curiosity or what what what spurred over there?

Michael Carro 8:02

I'll tell you what spurred. So I had uh two of my tenants at Midtown uh said, hey, listen, we really like it here, but you know, we want to own our own space. So can you help us look for another space? And my answer is always gonna be yes. And so it really made me thinking, well, if I could offer them the space that they already like, would it make more sense? And that's actually what spurred the idea. And so my plan right now is uh is to I haven't gone out to market with the vacant spaces because we have about five vacant spaces out of the 26. So what I thought I'd do is market those five vacant spaces. My goal is to is to maybe get three under contract before I record the declaration of condominium. So right now it's not recorded, which means it's not individually deeded. So I don't want to just sell one and go through this whole process of creating these 26 deeds. Um, but I thought it would be worthwhile if I can get two or three sold and then go in and and do this. So that's kind of where I'm at with this process. Um, but I'm kind of excited to test it out because listen, if this works, and I'm sure there maybe some of you out there that have done this already, but if this works, I mean, we can do this with a whole bunch of properties. I mean, we have we have uh uh is it 12 or 13 units, uh Berry Hill Plaza? 12, yeah. You know, so we've got Berry Hill Plaza. Each one of these units is small, it's 1,155 square feet each. Again, not that I have a desire because we really like that property as well. I think we like all of our properties, actually. You know, some more than others. Some more than others. That's how it's cash flow. So they're all our little babies. We want to take care of our babies. Yeah, you love all your kids, you know. But not equally.

Don Redhead 9:52

But well, you probably love them equally, but you like them more at certain points.

Michael Carro 9:57

Yeah, you know. No, some kids you love more.

Don Redhead 9:59

It depends if they just misbehaved and then you go, well, I love the other kid more.

Pricing Comps And The Parts Theory

Michael Carro 10:03

No, um my love is not conditional. Oh, so unlike what Donnie just said, that's not how I am. Apparently that's where I am. I um but I but I will love one more than another. It's just hard not to. So um, and you're lying to yourself if you say you don't. So uh because we're we're we're conditioned, conditioned to love equally. Um, but anyways, so um uh if Adam, if you want to cut this out part of the episode, you're welcome to. Um so I just think that that this could have legs because let's say I go out and if I were to go out and sell this property today, let's just say it's worth make up a number four million dollars. Well, if I break it into parts and it's worth five and a half, was it worth it? If I broke it into parts and it's worth four and a half, probably not. If I broke it into parts and it's worth seven, heck yeah. Um, so I really don't know, you know, uh uh exactly what the what the market is for something like this. I do believe that there's going to be, you know, at least a at least a 20% to 30% improvement uh if I were to sell it individually uh versus as a whole. Um and but at the same time, if I sell our finance, now listen, it's up to them. They can go get traditional financing, and that's totally okay. Love that. But um a lot of people love uh uh owner financing because the costs of getting the loan are so much less. And so, and for me, if I could be the bank on something and start making that interest on top of it, well then they win because they have the joy of ownership. We win because we also get a return on our investment. So um, you know, if we can create these win-wins with our existing tenant and other folks that, you know, want to be part of something that has maybe a lower cost of ownership, because, you know, when you're in a condo, a lot of these common area expenses are shared. And so the cost of ownership can simply be less. So that's another advantage to uh to a buyer. And then of course we have the advantages of potentially selling.

Don Redhead 12:13

And is it is it as simple as simply running out and say your building is, I don't know, 40,000 square foot and you have a bunch of 2,000 square foot spaces running comps for those 2,000 square foot spaces and seeing how it it compares to a 40,000 square foot building, is that a probably a good place to start? Or is there somewhere else if someone was wanting to do that that they should run?

Closing Thoughts And Subscribe

Michael Carro 12:39

I think I would start with what you initially said. If you have a 2,000 square foot uh office space, what are other 2,000 square foot comparable office spaces selling for? That is a real comp. You wouldn't say, I've got this 2,000 square foot space, but what would a 40,000 square foot building sell for? You know what I mean? So um, so that's that's why I think because a smaller space sells for a higher price per square foot than a bigger space, you know, intuitively, right? Every if everything is is is essentially the same location, condition, uh type asset class, right? So um, but yeah, a thousand square foot is definitely a higher price per square foot than a hundred thousand square foot space. And so that's why the sum of the parts should be worth more than the whole. So um or the individual parts rather. So that's the theory. I guess in about a year I'll tell you whether or not we had any success whatsoever, or we wasted all this money and and time and effort. But even if even if it's a bust, we still learned something. Yes, and we still got a podcast out of it. And we still got a podcast out of it. Are we done with this one? I think so. Okay, that wraps up another episode of the Blue Dirt Podcast. Idiot Nation, you're with us till the end. Have a great day. 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.