By: Bret Morriss, Managing Director | San Diego
While many firms may be saving available cash to ensure continuity through the COVID-19 pandemic, alternatively some companies are surviving or even thriving at this time. Thriving firms may have an opportunity to make a great investment in their future by acquiring the real estate they occupy.
The Small Business Administration (SBA) does much more than administer COVID-related protection and business lifelines—they also offer small business lending programs. The 504 and 7(a) programs run by the SBA promote business growth by providing long-term, fixed-rate financing used to acquire real estate and assets for expansion or modernization. These programs can apply to financing buildings, land, renovation costs, furniture, equipment and even soft costs.
These loans provide up to 90 percent loan-to-cost financing, provide long 25 or up to 30-year amortization schedules. Because of the SBA guarantee and low leverage on the first trust deed provided by the bank; the rates are typically more attractive than other commercial real estate debt. Right now, those rates are approximately 3 to 3.5 percent and are fixed for the term of the loan.
When determining if now is the best time for your company to purchase the building you occupy, there are a number of important considerations.
- Rates are historically low. At the end of April 2020, rates on the 20 and 25 year 504 loans were hovering at 3.0 percent, while the 10 year was about 15 basis points tighter. The all-time low on the 20-year was 2.90 percent and was achieved in March 2020. In contrast to the recovery of the great recession, the same 20-year mortgage priced wider than 7.6 percent in November of 2008.
- Cost sharing and comradery. Do you like having other companies as neighbors? Many office and industrial properties are sold as condo units, which are typically smaller in size and have other owners in the project to share costs and comradery.
- Subsidize your mortgage. You need only occupy 51 percent of the property and can lease the remaining portion to help pay the mortgage and associated property costs. Borrowers also have up to one year to meet the occupancy requirements if the current leases don’t allow for them to do so immediately upon acquisition. Becoming a landlord provides your company with built-in expansion space, covers some of your costs, and builds equity and net worth more quickly.
- Diversify and build equity. You can diversify and build equity in multiple ways. As a business owner, you may always have pictured the day that you build a successful book of business, put together a well-oiled machine of employees, and sell the company to fund your retirement. When you are the owner of your real estate, tenants continue to pay you rent on the building beyond your active involvement in your current firm. Additionally, if you are inclined to invest in additional real estate for your portfolio, you also have the option of investing your self-directed IRA into purchasing the property.
- Current SBA programs. Lastly and most important to timing your purchase now is the SBA’s debt relief programthat allows the SBA to automatically pay the principal, interest and fees of current 7(a), 504, and microloans for a period of six months. The 6-month payment relief is not a deferment, but actual debt forgiveness. The SBA will also automatically pay the principal, interest, and fees of new 7(a), 504, and microloans issued prior to September 27, 2020.
Our team of experts and lenders are here to help and are available to navigate the qualification standards and exact costs for potential investors.
Disclosure: The ideas above are opinions and should be reviewed and verified by a certified public accountant, a banker familiar with SBA lending and an attorney where necessary. The author of this article does not represent to be any of those titles and is sharing information from a trusted source.
About the Author
Bret Morriss serves as Managing Director of Stream’s San Diego office. Bret manages the real estate services office, responsible for acquisitions, leasing, property management and development in the San Diego market.In his career, Bret has been responsible for due diligence and closing more than $2 billion in loans on commercial real estate assets. He has underwritten and valued hundreds of hospitality, office, medical, retail, multifamily, manufactured housing and storage properties, and portfolios nationwide.