Better to buy than lease space?

A drop in interest rates on commercial loans is prompting many small northern Nevada businesses to consider purchasing, rather than leasing, office space.

But not everyone in the commercial real estate industry agrees that the availability of cheap money means businesses should rush out to buy property.

"There is a lot of interest from small business in buying because of the interest rates," said Tim Ruffin, managing partner, Colliers International, in Reno, an international commercial real estate firm.

"But it is still not a home run." For one, interest rates may be down but the cost of real estate isn't, according to Ruffin.

"The cost of land and labor is up," he said.

Ruffin estimates that purchase of a typical office space currently costs about $185 per square foot, while a lease on a garden office would cost about $1.75 to $1.80 per square foot per month.

In addition, said Ruffin, businesses have to consider other factors, such as taxes.

In his scenario, $50 of the $185 per square foot to buy is the cost of land, which can't be depreciated.

On the other hand, said Ruffin, the entire cost of a lease can be

expensed, an advantage for most small businesses.

Ruffin said businesses should consider their exit strategies when trying to decide whether to buy or rent.

"Buying makes a lot of sense for someone like a sole practitioner dentist who knows he'll need 2,000 square feet for the next 20 years," said Ruffin.

"But a law firm just starting out with two partners that expects to grow should lease." Still, in the current climate, buying office space is a better deal for most small businesses, said Tom Traficanti, vice president and real estate lending manager at Heritage Bank in Reno.

Businesses now can get a 20-year, fixed rate loan at about 7 percent interest, said Traficanti.

That's down from over 8 percent last year and over 9 percent before that, he said.

"Rates have never been this low," said Traficanti.

Traficanti contends that over the life of a 20-year loan at 7 percent it would be significantly less costly for a business to buy than to lease.

A 5,000-square-foot office at $185 per square foot, for example, would require 10 percent, or $92,500, down and a loan of $832,500.

That works out to about a $6,150 monthly payment, which is about $1.23 per square foot per month (not including taxes, insurance and maintenance costs), compared to $1.75 per square foot to lease.

With small businesses, the Heritage Bank and others often work with the Small Business Administration and one of its loan programs.

The SBA 504 loan program, for example, can help a business to secure a 20-year fixed loan at around 7 percent with 10 percent of the purchase price down.

The bank usually provides 50 percent of the loan and the SBA puts up the remaining 40 percent.

All those loans go through what the SBA calls Certified Development Companies (CDC).

Nevada State Development Corp., the CDC for the state, has processed 79 SBA 504 loans for $33 million so far in 2002.

(Only a third of those are in northern Nevada; the remainder were made in Las Vegas.) That's about the same as last year, according to Bobbi Bennett, president of the CDC.

"After 9/11 there was a slowdown but it has picked up and now it is on par with 2001," said Bennett.

But 504 loans are up 13 percent nationwide.

Keeping a lid on it in Nevada, said Bennett, is a crackdown by the SBA.

"The number of loans in default are about three times more than last year so the SBA has been forced to decline more loans," she said.

Bennett attributes it to a slowdown in tourism, but said the situation is improving with fewer new loans now going into default.

Still, Bennett said, "the SBA used to be willing to make loans based on projections.

Now they look for a track record." One of those businesses with a track record is University Car Wash on North Virginia Street in Reno.

Joelene Strozzi and Vickie Draper, co-owners of the 18- year-old car wash, wanted to update one of the business' six bays with a touchless car wash.

They had been shopping around for equipment for a year when interest rates began to drop so the pair decided to refinance a 12 year-old, 9 percent interest loan to pay for the expansion, said Draper.

"If the rates had been higher we would have put it off," she said.

The new loan, through Heritage and the SBA 504 program, enabled them to update to touchless, install new vacuums, sign and vending machine, and do some work on the pavement, said Draper.

Like University Car Wash, Kuckenmeister Bayliss Casey & Allen LLC had a track record.

The new accounting firm was created when in 2001 its members bought out Kafouri Armstrong & Co., an 18-year-old CPA firm in Carson City.

The firm had just moved into a new, 10,000-square-foot office.

The new group wanted to buy the building as well as the practice so they went to the SBA and secured a loan at 7.5 percent interest.

"We would rather pay rent to ourselves," said Randy Kuckenmeister, member.

That's how Drs.

Paul Wilson, James Conkey and Albert DuFur, felt, too.

The three optometrists formed Nevada Vision Group and purchased a 5,800-square-foot building on Sierra Rose, between Talbot and Kietzke.

The three still maintain separate optometry practices, but have formed a corporation that owns the building and leases the space back to each doctor.

They share reception and some space for display of eyeglass frames.

The trio had been planning to buy property as a way to reduce costs, said Wilson, but the final piece of the puzzle was an affordable loan.

"We wanted to build equity and we knew we had to come up with the money," said Wilson.

"The interest rates made it all feasible."