WHAT IS AN OFFICE CONDO?

What is an office condo?

An office condominium is a portion of an office building (referred to as a "Unit") that can be purchased, rather than leased, from the owner/developer of the office building (referred to as the "Sponsor"). The owner of the office condominium unit (the "Unit Owner") holds title to the premises and has full control over any and all design elements within the premises. Office condominium units may also be purchased from another Unit Owner. The condominium unit may be as small as a single office suite among many suites on a floor of an office building, or it could consist of an entire floor of an office building, or even several combined floors. Any construction or other improvements made to the premises of the office condominium belong to the Unit Owner.

Who is TEI?

With a team of principals and senior executives who share decades of experience in their respective fields, Time Equities, Inc. ("TEI"), is New York's leader in office condominium sales. A privately held, full-service real estate company, TEI has been acquiring quality real estate locations with good market fundamentals and future potential for more than 40 years.

Currently, TEI owns more than 16 million square feet of office, industrial, retail and residential property in 25 states and four Canadian provinces, and has approximately six million additional feet in development. The TEI office condominium properties represent a significant portion of the overall Manhattan office portfolio, backed by an experienced team of professionals dedicated to exceptional management and meeting the specialized needs and reporting requirements that quality office condominiums demand.

WHY BUY?

Advantages of Ownership

Owning an office condominium allows tenants the ability to lock in their occupancy costs and insulate themselves from the ever-rising expense of office leasing in Manhattan. Controlling office occupancy costs provides a means for an office tenant to better control the future of their business. The benefits from an investment perspective include the ability to write off depreciation and interest expense, and profit from the long-term capital appreciation of such a valuable asset. Furthermore, owners who anticipate future expansion can purchase a larger unit and sublet the excess space to a third party until the owner is ready to expand. As a result, the owner with a growing business is not penalized by increased rental rates at the time of the expansion, and, in the interim, the sublet tenant subsidizes the costs of the future expansion space.

In addition to the long-term financial incentives, owners enjoy managing their own premises with the flexibility to control all aspects of design and function for their specialized use and occupancy. Meanwhile, the management of the property and its building systems are handled by the condominium's management team, affording the owner the best of both worlds. Furthermore, a Unit Owner can feel good about investing in construction and improvement costs in an office condominium, knowing it is theirs to keep. Such an investment in improvements under an office lease would be lost by the tenant at lease expiration and become the property of the landlord. Finally, there is also an overall sense of personal satisfaction that comes from owning your own office.

Additional Advantages for Not-For-Profits

In Manhattan, a not-for-profit can become exempt from real estate property taxes as an owner of an office condominium. There are numerous financing sources for not-for-profit mortgages. Additionally, it is often easier for not-for-profit organizations to raise one-time grants or donations to fund an investment – such as the ownership of office space – than it is to request donations for ongoing operating costs.

Manhattan Office Market Capital Appreciation*

The Manhattan office market has often remained resilient despite financial challenges affecting other segments of the economy. Although the sub-prime crisis has had a substantial negative impact on the major lending institutions, office sales volume in Manhattan experienced its third consecutive record-breaking year in 2007, with approximately $48 billion in sales. This surpassed the previous record of $34 billion in 2006, which in turn surpassed the previous 2005 record of $21 billion. From 1997 through 2007, the annual appreciation for midtown Manhattan office sales (class "A") averaged 13.2%. This does not factor in sales during the first quarter of 2008, where average sales reached an all time high of $1,015 per square foot.

During 2007 alone, 10 office buildings sold for more than $1,000 per rentable square foot, including 450 Park Avenue, which sold for $1,585 per rentable square foot, and 666 Fifth Avenue, which went for $1,238 per rentable square foot*. Due to its physical limitations as an island, Manhattan's office supply will always be constrained. The limited supply of office space coupled with the steady increase in demand will continue to drive prices upward – especially in the Midtown submarkets.

*Source: Cushman & Wakefield Capital Markets Group – Manhattan Market Overview, First Quarter 2008

Manhattan Office Leasing Market*

During 2007, direct asking rents continued to increase, reaching a new record high of $61.50 per rentable square foot (overall average) at year-end. Furthermore, there were 93 lease transactions consummated during 2007, with rents exceeding $100 per rentable square foot. At year-end 2007, the overall office vacancy rate had decreased to a record low of only 5.3%. At the end of the first quarter of 2008, the overall vacancy rate had increased slightly to 5.4%, yet average rental rates rose to $64.36 per square foot – a new record high.

Today, a tenant weighing the decision of entering into a five-year lease versus investing in an office condominium should consider what the financial factors will be at the lease's expiration. In five years, it is highly likely that a tenant will be faced with the decision to either renew their lease at a much higher rental rate or move to a location where the tenant will not only pay a higher rental rate, but will pay for tenant improvement costs as well (which will remain the property of the landlord after the tenant moves out). Instead, if the tenant had purchased an office condominium, he would be protected from increasing occupancy costs and would enjoy an increase in value from five years of capital appreciation in his investment.

*Source: The CoStar Office Report (New York City Office Report -- First Quarter 2008)

WHAT IS THE PROCESS FOR BUYING AND SELLING OFFICE CONDOMINIUMS?

Due Diligence

The due diligence is already provided for the buyer in a detailed report referred to as the "Condominium Plan." In order to put forth an offering for the sale of office condominiums, the Sponsor must first submit the Condominium Plan to the Attorney General's office of the State of New York for approval. The sale of the office condominium units may not commence until the Sponsor receives written confirmation from the Attorney General's office confirming that the plan for selling office condominiums has met all of the requirements for full disclosure and sufficiently sets forth the proposed guidelines for the operations of the office condominium property. A copy of the office Condominium Plan is provided to every potential buyer.

No Undisclosed Deferred Maintenance Issues

The office of the attorney general's primary focus when approving condominium plans for marketing is to ensure that the Sponsor makes a full detailed disclosure of the property to potential buyers. Such disclosure is not required from landlords who lease office space to tenants.

However, the sale of office condominiums requires that a detailed property report completed by a licensed architect and engineer be included as part of the Condominium Plan for all potential purchasers. Any potential maintenance issue or needed capital improvement must be fully disclosed within the Condominium Plan and identified as what is known as a "Special Risk."

Executing the Contract

After reviewing the architect and engineer's report and identifying an office condominium to purchase, the potential buyer will execute the same form of contract as included in the Condominium Plan, depositing 10% of the purchase price with the escrow agent. At this time, the office condominium unit will not be available to other purchasers in the market. From the date of contract execution, the sale could close within as little as 30 days.

Available Financing

There are many available means for financing an office condominium. Aside from the typical real estate mortgage division of a financial institution, loans for purchasing an office condominium may also be obtained (and at often more favorable terms) through the "business" sector of banks – the same banking division that handles a company's business banking services. There are also small business administration (SBA) loans for small businesses as well as IDA financing for not-for-profit organizations. TEI can provide you with a list of potential lenders for your office condominium purchase.

HOW DOES AN OFFICE CONDOMINIUM BUILDING WORK?

What is included in a TEI office condominium unit?

Each unit in the Condominium Plan consists of the area from the top of the concrete slab floor to the bottom of the concrete ceiling of the unit above. Horizontally, the unit spans from the exterior side of the façade or exterior building wall (or glass windows) at the building line to the midpoint of the walls separating the unit from the other units or common elements (or other side of the building exterior, if the unit encompasses an entire floor).

Common Elements

Common elements and limited common elements are defined in the Condominium Plan as the entire property other than the condominium units. Each Unit Owner has an undivided interest in all of the common elements. Common elements would include the elevators and lobby of the office building, while limited common elements would include items such as roof terraces, which benefit some, but not all, of the Unit Owners within the building.

Maintenance of the TEI Office Condominium Property (Common Charges)

The management and operations of an office condominium building are governed by the direction of the condominium's board of managers (the "Board"), who, in turn, are elected by the Unit Owners. Each member of the Board must also be a Unit Owner (or a representative of the Unit Owner). The Board relies on the managing agent to supervise and manage the day-to-day operations and expenses of the office building. The costs associated with these day-to-day operations are shared equally among all of the Unit Owners in the building through stable monthly maintenance expenses known as "monthly common charges." These monthly common charges are billed to the Unit Owner each month and do not fluctuate. They are adjusted on an annual basis as determined by the Board based on the costs and expenses of the previous year's operations, as well as projected expenditures (and/or increases in expenses) for the upcoming year. As such, each Unit Owner is given a "voice" in the operations of the building through the elected Board.

Maintenance expenses that are typically included in the monthly common charges would include (but are not limited to) heat, security, landscaping, elevator operations, electric costs for the common areas, cleaning for the common areas and – in most cases – air conditioning. (The only exception for air conditioning would be the office condominium units at 70 W. 36th Street, which have their own separate air conditioning systems within each unit.)

Working Capital Reserve Fund – TEI Office Condominiums

At the closing of each office condominium sold, the Sponsor shall contribute $5.00 per useable square foot of the unit being sold (per the square footages listed in Schedule A of the Condominium Plan) to the Working Capital Fund for the condominium. The Working Capital Fund will be held and used to cover current or future expenses for condominium operations, capital improvements or for other such appropriate purposes.

Maintenance of the Condominium Unit – Cleaning and Electric

The individual Unit Owner is responsible for the cleaning of its premises and the cost of electricity for the individual premises. In the interest of security, Unit Owners use the same cleaning company for their individual premises as the cleaning company hired by the condominium for the cleaning of common areas within the building.

Each Unit Owner may choose between two methods of billing for electric service to the unit: (1) inclusion rate; or (2) submeter. The inclusion rate method bills Unit Owners based on a flat electric rate per square foot, multiplying this rate by the square feet of the unit (as listed on Schedule A of the Condominium Plan). This rate is subject to an increase based on rate increases from the electrical supplier (i.e. Con Edison or another supplier) and/or an electrical survey performed by the condominium's utility consultant. Alternatively, the Unit Owner may instead choose to install a submeter and arrange for it to be read by the condominium's utility consultant, who will take a reading each month and invoice the Unit Owner accordingly based on actual electric usage.

Real Estate Taxes

Each unit is taxed separately by the city of New York and has its own separate Lot number that can be accessed online at the New York City government's website. Some owners, such as not-for-profit organizations and government agencies, could become fully exempt from real estate property taxes after buying an office condominium and promptly filing the proper forms for exemption with the city of New York.