How a company should be capitalized is a function of many factors, among them, profitability, plans for future growth, and the assets required to operate a business. Low interest rates, minimal inventory and double-digit price appreciation has many occupants of office, retail and industrial space asking themselves if it would be better to own rather than lease their space. While essential transaction metrics tend to drive that decision, there are qualitative variables that also need to be considered.
Owning real estate has many significant benefits, but it is not for everyone. Leasing has its own advantages, including conservation of cash resources and greater availability of premier locations that a business could not afford to own directly. Leasing also offers the flexibility to respond to changing space needs as a business matures. However, the disadvantages of leasing include rising rents and the cost of tenant improvements not provided by a landlord, lack of control and stringent contractual obligations.
Commercial real estate in Southern California has a strong history of value appreciation. So, many business owners see the long-term benefit of investing in owner-occupied property. Acquiring real estate that you then lease to your own company is a way for you to build equity through value appreciation and loan principal pay down, while you receive an alternate income stream, tax benefits and control of your company’s occupancy cost. On the other hand, disadvantages are upfront capital requirements, increased liability and possible losses due to changes in market conditions.
My clients are always asking about the different loan options available to them and while there is no “one size fits all” loan, I always make sure they are aware of the benefits that an SBA loan can provide. Here are 5 reasons why business owners should consider SBA financing when purchasing commercial real estate.
You only put 10% down. The SBA program allows business owners to put as little as 10% down for their owner occupied commercial real estate. By retaining capital, business owners can remain focused on other capital requirements such as personnel, inventory, R&D, advertising, etc.
Fixed 20-year interest rate. With interest rates continuing to rise, the SBA portion of the loan is a 20-year fixed, fully amortized loan. This gives small business owners a clear idea of what they can expect to pay, allowing for effective planning and budgeting. The SBA note can also be assumable, which is attractive to companies who may sell their property down the road.
SBA fees can be bundled into the loan. The SBA 504 loan fees are financed into the loan and amortized over 20 years. They are not paid out of pocket, allowing the borrower to retain even more liquidity for working capital.
Collateral is limited to the business. The bank and SBA will typically only take the subject property as collateral in the event of default. Should the business become insolvent, the owner’s personal assets (such as your home) are protected and separate from the business.
Other items included in the loan: The cost of a build-out (tenant improvements) and equipment can be included. For example, a dentist could include the cost of new dental chairs into the loan.