Slash your company or professional firm’s “effective” lease rates dramatically.
Become your own Landlord with the help of an SBA 504 Loan. Today’s record low interest rates for a building purchase can help you, by a wide margin in most cases, to beat the high lease rates offered by your Office or Industrial Landlord.
Plus, by renting from your own LLC, you can capture depreciation and, hopefully, gain appreciation, neither of which you could ever do by remaining a Tenant of your current Landlord.
For many Tenants, this is a no-brainer. But please read on to see why.
In many submarkets of Austin and Denver/Boulder (and in many other cities), NNN rental rates are still quite high for Office, Warehouse and Flex/R&D Tenants. If a creditworthy Industrial or Office Tenant can find a suitable building or commercial condo space to purchase, then buying with an SBA 504 Loan can cost-wise seriously beat the heck out of leasing space. In many cases, it isn’t even a close contest when we run the numbers.
Before reading further, though, you need to know that the upper limit for most Buyers on an SBA 504 Loan is $5,000,000 for Office/Flex Users and $5,500,000 for Manufacturers.
Adding fuel to this fire, the FASB Rules for lease accounting force Tenants that use GAAP Accounting Rules to show the entire value of their multi-year leases, plus all renewal option periods on their balance sheets. As a result, it may make sense for smaller to mid-sized, privately held companies and professional firms (think attorneys, accountants, architects, engineering firms and medical, dental and veterinary practices) to seriously consider buying or constructing their own buildings.
Frankly, for private firms with fairly stable workspace needs, owning your own building and paying rent to yourself can make far more financial sense than continuing to lease space from your Landlord. As bonuses for Owners, depreciation and appreciation can be the icing and candles on your cake.
Case Study: Buy with SBA 504 Loan
Our Flex/R&D Client received a national Landlord’s offer to renew its lease for five (5) years at $11.04/SF triple net (“NNN”) per year, along with three percent (3.0%) annual increases. While we objected to the Landlord’s too-high proposal, our research and multiple forays into the market ended up validating it (reluctantly) as a fair market lease renewal deal in Denver / Boulder’s overheated Industrial/Flex Market.
But we didn’t accept the Landlord’s bad news or the very tight Industrial/Flex Market lying down. We persevered, broadened our search parameters, toured more buildings for lease and eventually found an excellent Flex/R&D opportunity for our Client to purchase. Our Client’s commercial banker was a huge help and supported the decision to purchase by offering our Client an SBA 504 Loan.
Buying a building effectively lowered our Client’s annual rental rate by 37.4% in Year 1 to $6.91/SF NNN (fixed/flat/no increases for ten years!) versus renewing his lease for five (5) years. As our Client said, “This is a true no-brainer.”
CAVEAT: Our Client was very wise and avoided the #1 Mistake that most Commercial Occupiers make: starting their evaluation and search process too late. In this case, our 18,000 SF Flex/R&D Client started the lease renewal process with us eleven (11) months before its lease expired, not thinking at all that it would end up buying a Flex building. Starting early enough gave our Client and us long enough to explore all of the lease options available and then evaluate the “What If” Scenarios of buying.
How soon an Occupier should start depends on its size, zoning needs and any special needs, such as utility requirements for electricity, gas, water and Internet/communications services. While most Tenants start this process too late, it is also possible to start too soon, especially for a smaller Tenant in a hot market. An experienced Tenant / Buyer Rep can help you to figure out the right time for your organization to get the ball rolling, including for new construction related to a build-to-suit or design-bid-build project.
Here are some important details to know about many lenders’ SBA 504 Loan Programs…
- Down Payment: 10% down payment, but any tenant improvement (“TI”) costs incurred by the Buyer, up to 10% of the Purchase Price, can also count towards the down payment.
- Interest Rate: Low, fixed interest rate (blended rates from the Lender and SBA), right now in the range of 4.0% to 5.0%.
- Loan Term: Five (5), seven (7) and ten (10) year loan terms are available, maybe fifteen (15) years in some instances. At today’s low interest rates, it makes sense to go as long as possible.
- Amortization Period: Most SBA Lenders allow a 25-year amortization period for the Buyer’s monthly payments of principal and interest. (These monthly payments, in effect, are your NNN rent.)
- Origination Fees: Some SBA Lenders do not charge Origination Fees; for example, a 0.5% “Participation Fee” will often be paid by Wells Fargo or Chase when an SBA 504 Loan actually closes.
- Personal Guarantee: No Personal Guarantees are required, assuming the Buyer has good credit; this is a huge benefit to qualifying Buyers.
- Occupancy Requirements: The Buyer must occupy at least 51% of the floor area of the subject building or condo space, as per SBA 504 Loan Program requirements. However, it’s 60% of the floor area if it’s a build-to-suit or design-bid-build.
In addition, Chase, Wells Fargo and some other SBA Lenders would allow the following “soft costs” and upfront expenses to become part of a Buyer’s 10% down payment for an SBA 504 Loan, which further sweetens the case for buying…
- Physical Building Inspection: Find deficiencies upfront in the target property, for example, roof, HVAC equipment and drainage issues that may require expensive maintenance, repairs and/or replacement. The Seller might address some or all deficiencies or may even consider reducing the Selling Price. However, if the issues uncovered are severe or too expensive to fix, the Buyer can elect to terminate its Purchase Contract, get back its Earnest Money and avoid buying a “lemon.”
- Phase I Environmental Site Assessment (“ESA”): Also called a “Phase I,” to ensure that subject property or condo space does not have hidden Environmental Issues, which can sometimes cost more to clean up than the Purchase Price of a property.
- Legal Fees: Buyers should hire a real estate attorney, not a general business counsel.
- Space Planning & MEP Engineering Fees: It might be necessary to have a professional Space Planner produce formal drawings to determine if your long-term operations can fit successfully into a space and perhaps elevate your Space Plan to a formal Preliminary Pricing Plan in order to obtain competitive TI cost estimates from several General Contractors.
- Structural Engineering Fees: If there are any concerns about structural elements, for example, floor loading or weight-bearing issues, then it might be necessary to have a Structural Engineer inspect the building or space.
- Zoning Verification Letter: Make certain the legally allowed use(s) of a property will allow the Buyer’s intended use.
- Building Permit & Fees: If certain kinds of Tenant Improvements (“TIs”) are required to modify the space for the Owner-Occupant’s use, particularly Mechanical, Electrical and/or Plumbing (“MEP”) components, then official Demolition and/or Building Permits may be required.
- ADA Inspection: Consider whether or not the building or space is compliant with the Americans with Disabilities Act (“ADA”), especially the restrooms and entrances/exits from the building.
SUMMARY & CONCLUSION
If your privately held company or professional firm has good credit and is experiencing sticker-shock over today’s rental rates for Office or Industrial space, then buying a building or commercial condo with an SBA 504 Loan might be the perfect way to beat your Landlord’s high rental rates.
Other major benefits of buying your workspace include depreciation and, if the Buyer is fortunate, appreciation in the value of its building. Even if you might sell your company or professional firm, there may be a future opportunity to lease your building or condo space to someone else and turn the investment into a valuable vehicle for your retirement and an asset for your estate. You can’t really do any of these things by continuing to lease space from a Commercial Landlord.
Today’s super low interest rates, combined with a 10% down payment for an SBA 504 Loan, can make buying a great way to beat high lease rates and cause your decision to be a true “no-brainer.”
For more details on the new FASB Rules for lease accounting, please see our blog article, Treatment of leases under new FASB Rules to be painful.
Contact William Gary, MBA, MIM, at cell/text +1 303-901-1108 or email wgary@MacLW.com to confidentially discuss your interest in purchasing a commercial building or office condo with an SBA 504 Loan. Learn how to get The Gold Standard of Representation for your next commercial real estate transaction. As 100% Buyer/Tenant Representatives, MacLaurin Williams Worldwide can advise you without conflicts of interest in nearly seventy (70) major markets, including in Denver/Boulder, Colorado, and Austin/Round Rock, Texas, where we have licensed offices.