Is it Time to Take advantage of the "Perfect Storm" in Commercial Real Estate with the SBA 504 Loan Program?
It is rare to see commercial real estate prices drop by more than 40 percent in a market. This occurrence might only happen once or twice over a 100-year period. It is also rare to see commercial interest rates at a historical 40-year low but for both of these events to occur at the same time it is truly the "perfect storm" in commercial real estate. The buyers in this market are locking in some incredible interest rates and buying an asset for far less than the cost to build the property. Nevada State Development Corp. is currently working on over $30 million in SBA 504 loan projects in northern Nevada. With the 504 loan program, business owners can make a low down payment and get a long-term fixed interest rate. Many of these small business owners have been leasing for many years but see the strong benefits of purchasing in this "perfect storm" market. It is not often when purchasing a commercial building can be cheaper then leasing one.
Let's look at an example of this anomaly: A 6,250-square-foot office building selling for $1 million or $160 per square foot would have total loan payments of about $5,500 per month or 89 cents per square foot. This is much lower than the $1 to $1.10 per square foot triple net that a similar office building would lease 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 $5,500 monthly payment about $2,000 is going to principle reduction or a positive way to look at it, you are increasing your net worth by $2,000 every month. The true cost of that building becomes approximately 56 cents per square foot triple net ($5,500-2,000= $3,500/6,250=56 cents). So for the short term, you can rent your building for $1 per square foot, or for the long term you can buy your commercial building for approximately 56 cents per square foot. This example does not include the advantage of depreciation or additional tax savings that could further decrease this cost by an additional 9 cents to 12 cents per square foot.
Jeff Turnipseed, Barrett Donovan and Matt Rasmussen, owners of Tectonics Design Group, took advantage of favorable interest rates and market conditions three years ago when they purchased their office building. "The SBA 504 loan program was a huge help in allowing us to change our rent payment into a loan payment and save money at the same time. We've now got three years of equity under our belt and our choice appears to have been a good one," they say.
The SBA 504 loan program is designed perfectly for a business owner to purchase a commercial building or long-term equipment because it has a long term fixed interest rate. For most existing businesses, the 504 program just requires a 10 percent down payment and in some cases only a 5 percent down payment. The SBA 504 is set up for the business owner who will occupy at least 51 percent of their commercial building (60 percent for new construction) with loan sizes from $55,000 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, mini storage and hotels. The SBA 504 loan program involves a commercial loan from a bank for 50 percent of the project and a second loan for up to 40 percent of the project, which is the SBA portion. The interest rate on the SBA portion is currently 4.46 percent. The SBA 504 has a counterpart in the SBA 7a program. However, the 7a loan carries a variable interest rate and is usually not suitable for such a long-term asset. For long-term assets, most people want to lock in these historically low interest rates for the full term of their loan.
The SBA 504 portion of the financing is a 20-year, fully amortized, fixed-rate loan that is backed by the U.S. government. Because this loan program is a self-sufficient program and doesn't rely on taxpayer's money, the fees are a little higher than a regular commercial loan. All of the fees are wrapped into the loan at these low interest rates and the fees usually take 18 to 24 months to be absorbed or to break even. The application package is the same information for which the bank will ask plus a few forms to sign and underwriting and approval generally takes one to two weeks.
John Rutledge, owner of Rutledge Law Center, says the SBA 504 loan process was "quicker and easier than I anticipated." He was able to secure a low, fixed-interest rate on his SBA loan and concluded "I encourage every small business to consider SBA financing to help achieve its acquisition goals."
One of the biggest benefits in using the SBA 504 Loan program is that you will not be making someone else's mortgage payment, but rather, your own. So while other tenants are bragging about their two-year lease rates, start thinking longer term and take advantage of the "perfect storm" that is occurring in commercial real estate right now. In the future, this may mean a great deal to your business and your own financial net worth.
Nevada State Development Corp. is a non-profit that started in northern Nevada over 30 years ago and has helped over 1,800 Nevada companies buy their own commercial buildings. The SBA 504 loan program is administered through Nevada State Development Corp. and other Certified Development Companies across the United States. We recommend that you check with your tax advisor for the full benefits of owning a commercial building.
Brian Wallace is business development officer with Nevada State Development Corp. in Reno. Contact him at 770-1205 or bwallace@nsdc.com.
