Commercial office property availability is at prime levels for owner-occupier buyers.
"Why is it a good time?" you might be asking.
1. One main benefit is that qualified buyers such as owner occupier, will have the peace of mind of buying property at historically low prices within a market that, in many experts' opinions, has bottomed out for certain types of office properties and is ready for steady growth upward.
2. The monthly cost of purchasing for commercial property owner occupants is virtually the same as leasing over a 10-year period due to the historically low interest rates to qualified buyers.
Here is a case study that Reed Simmons, office specialist of Avison Young Western Alliance Commercial, prepared that illustrates the eye-popping advantages to owning vs. leasing commercial property:
The study is an actual cost analysis of owning vs. leasing per year based on an office property located on Double R Boulevard. It recently was sold to an owner/occupant.
The general property description in the study is as follows:
Building size 3,426 square feet
Association fees$420/mo
Analysis period 10 years
Sale price $505,000
Down payment 50,500 (SBA loan 10% down)
Loan amount $454,500
Loan payment at 4.75% $2,591/mo $0.76/sf triple net
Triple net rent payment is defined as a rent agreement where the tenant pays the landlord the rent amount, and the tenant also is responsible for paying real estate taxes, association dues and utilities.
In this study, the owner will break even in yearly cash flow compared to leasing the same square footage space within six of the 10-year period of the purchase, and the total difference between buying and leasing is only $11,577, or $1,930 per year, over the initial six -year period.
Please note: The analysis does not include tax benefits for ownership, which will be discussed further in this article. In addition, the study presumes a flat real estate market with no market value appreciation in the ten year study.
The study also pointed to other advantages to owner-occupiers of commercial office property:
1. Inflation protection in the future is a predictable outcome in the coming years. A loan payment remains constant; once lease rates begin a steady increase, owning property will become even more economical going forward.
2. Owning commercial real estate will grow your retirement portfolio that is diversified and more stable compared to other investments.
3. Exit strategy benefits to consider include: Sale of the business to a successor will include a long term commitment of at least five years and will allow for regular income and participation in long term growth of real estate. Also, the owner could consider a sale leaseback of the property to free up the owner's net worth in the building for estate planning purposes.
SBA loan interest rates are at historically levels. In addition, SBA 504 loans offer some amazing advantages for owner-occupiers who want to purchase their own commercial real estate for their businesses. Those benefits include the minimum down payment requirement of 10 percent, a 25-year full amortization without any balloon payments and the ability to finance most loan costs and tenant improvements. Also, a purchaser can buy a building larger than his office needs and rent the balance out to another tenant, as long as he occupies at least 51 percent of the building.
There are essentially two types of SBA loans, the SBA 504 and the SBA 7-A. There are significant differences between the two.
SBA 7(a) loans are designed specifically for real estate with a term of 25 years with either fixed or variable interest rate options. Loan to real estate value can be as much as 90 percent. The maximum loan is $5million. For existing buildings, cash flow from the business must exceed the monthly debt service by 15 percent or more.
FICO scores must be 680 or higher, and additional collateral may be taken (includes UCC filings on business assets, deeds of trust on real property, life insurance, etc.). Prepayment penalties for SBA 7(a) s are 5 percent, 3 percent, and 1 percent in the first three years.
SBA 504 Loans can be for 15, 20, or 25 years fully amortized (no balloon payments), with fixed or variable rates. Minimum down payment is 10 percent and the maximum loan is $15 million. Debt service coverage is 115 percent of monthly cash flow. There are prepayment penalties.
4. The tax benefits of buying as opposed to leasing at this time include:
*The added return on your tax dollars, the reduced tax you will pay due to the depreciation expense of your building is considerable. The owner-occupier's return on tax benefits using traditional depreciation planning approaches can be 3 percent or higher per year.
* Purchase of commercial office property may include a tax-free or partially tax-free like kind exchange of real estate, called a 1031 tax deferred exchange. The qualifying property includes residential or commercial investment property such as second or third homes and undeveloped land. The IRS has specific rules to follow regarding like kind exchanges including a 180-day rule, including a 45-day new property identification period. The typical 1031 exchange sequence starts with the sale of the investor's old property and the purchase of the new one. The transaction must go through a qualified intermediary called an accommodator.
* There is an IRS approved method to increase your commercial office tax benefit called cost segregation study in which both existing and new buildings qualify under the certain facts and circumstances for the owner.
* Asset protection is also a best practice in purchasing commercial property for owner-occupiers. Asset protection is a prudent plan in case of legal disputes due to accidents or other property risks.
* Many savvy investors including George Soros and Warren Buffett are buying tangible investments, real estate, because the values are very attractive for long-term investment growth potential. George Soros is buying agricultural property in expectation of inflation in the future. The property values are also attractive due to our nationwide economic condition.
In summary, the prices for office buildings, the historic financing terms, and the tax benefits and asset protection advantages make this an ideal time to become owner -occupiers of commercial office property.
Seek advice from your qualified commercial property broker, tax, and legal advisors regarding your decision to become a commercial office property owner. This is a good time to consider buying over leasing, allowing you to reduce your monthly costs over an extended period, participate in growth of commercial real estate investment, and take advantage of tax benefits in commercial real estate.
Scott T. Wait, CPA, is a partner in RS Wait, Chtd. of Reno. Contact him at 775-825-7337 or scott@rswait.com. Reed Simmons, a broker with Avison Young, contributed to the article . Contact him at 775-332-2800 or reed.simmons@avisonyoung.com.
