Use of a SBA 504 loan can lock in your lease for 20 years

We are all starting to hear the incredible deals that businesses are negotiating on their tenant leases. Tenants are playing hardball with the landlord and coming out on top. But is this short sighted? The northern Nevada commercial market will recover someday and a normal inflationary rate will cause those lease expenses to rise dramatically over the next 20 years. Why not think a little longer term and set your lease expense for the next 20 years using the Small Business Administration 504 loan program?

The SBA 504 loan program is designed perfectly for purchasing a commercial building or long-term equipment because it has a very long-term fixed interest rate. For most existing businesses, the 504 program only requires 10 percent down payment and in some cases only 5 percent down payment. The SBA 504 is set up for the business owner that will occupy at least 51 percent of their commercial building (60 percent for new construction) with loan size from $125,000 to over $15 million. The program can be used to buy almost any type of owner occupied commercial property including office, industrial, flex-space, manufacturing, restaurants and hotels. The SBA 504 loan program involves two commercial loans for a project, one commercial loan from a local bank for 50 percent of the project and another second loan for up to 40 percent of the project, which is the SBA portion. The current interest rate on the SBA portion is currently 5.71percent. The SBA 504's counterpart is the SBA 7a program, which comes with a variable interest rate and may not be very suitable for such a long-term asset. The SBA 504 portion of the financing is a 20-year, fully amortized, fixed rate loan that is backed by the U.S. Government.

Let's look at an example: a 3,750-square-foot office building selling for $750,000 or $200 per square foot has total payments of about $4,775 per month or $1.27 per square foot. This is higher than the $1 to $1.10 triple net a similar office building would rent for in this market. But an important thing to consider is how much you are paying yourself with every mortgage payment. Over a two year average, of that $4,775 monthly payment about $1,250 is going to principle reduction. A positive way to look at it is that you are increasing your net worth by $1,250 every month. The true cost of that building is about 94 cents per square foot triple net ($4,775 minus $1,250 equals $3,525 divided by 3,750 square feet equals 94 cents per square feet.). So for the short term you can rent your building for $1 per square foot or for the long term you can buy your building for a cost of 94 cents per square foot. This example does not include depreciation or additional tax saving that could further decrease this cost by an additional 9 to 12 cents per square foot. Please check with your tax advisor for the full benefits of owning a commercial building.

The biggest accomplishment with using the SBA 504 Loan program is that someday you will not have a monthly lease expense or monthly mortgage. Then someday, 20 to 25 years from now someone else is going to be paying you $4,775 a month or more for your office building. So while other tenants are bragging about their two-year lease rates, start thinking a little longer term and what it will mean to your business and your financial net worth in the future.

The SBA 504 loan program is administered through Nevada State Development Corp.and other certified development companies across the United States. NSDC is a non-profit organization started in northern Nevada more than 28 years ago and has helped over 1,800 Nevada companies to buy their own commercial buildings.

Brian Wallace is a business development officer with Nevada State Development Corp. Contact him at 770-1205 or bwallace@NSDC-Loans.com.