Is Now the Time to Buy Your Space

If you are currently leasing your office, industrial or retail space, now is the time to seriously consider moving from being a tenant to owning your own commercial condominium space or building.   

Under the American Recovery and Reinvestment Act of 2009,   the Guaranty Fees for an SBA loan to purchase real estate, normally paid by the borrower is, for a limited time, waived.   On a $315,000 loan, this fee waiver will save you approximately $6,300.    Plus, unlike conventional loans, you only need about 10% down for an SBA real estate loan.   The combination of the fee-waiver, the 90% loan-to-value and the prevailing low interest rates, make this a very attractive time to consider buying commercial real estate to house your business.

Your choice made to lease or buy will has financial and operational implications for both your business and its ownership, so there are four important factors to consider. 

Factors to consider:

Your Cash Position.    One consider in making your lease vs. buy decision is your cash position.    If you are in a strong cash position that always makes purchasing real estate easier.    However, with programs like the SBA  7A loan, you can purchase space you would occupy for as little at 10% down.     That means you could purchase a $350,000 commercial condo for about $35,000 down.     The money you were using to pay rent, become use as mortgage payments.

Expansion Plans.    Another important consideration is the expansion plans for your business.    Everything else being equal, relative stable facility needs favor purchasing, while highly fluctuating space needs favors leasing.   Project out five years.    If you are unable to buy a building or condo that will support your growth over five years, you are better off leasing on a shorter term basis.

Return on Investment.     Is the return you can get on capital you use to purchase your facility as great or greater than you can get by placing that capital in expanding your core business?     Assuming you are relatively capital constrained (as many businesses are in these times tight credit), you need to be prudent about the amount of capital you have in real estate which could otherwise be invested in your core business.

Market Conditions.    Thanks to the Great Recession the commercial real estate market is soft, making this a “buyers’ market.”     There is best supply of purchase opportunities I have seen in 20 years I have been in the brokerage business.   Plus, interest rates are low, allowing you to borrow at 5.75 to 6.25%.    At 6%, a $330,000 mortgage will have monthly payments of $2,126 per month, based on a 25 year amortization.

There is an understandable tendency to hunker-down, and not take risks during recessions.     However, business owners who take advantage of the loan fee waivers and the buy their facility in this soft market, will be handsomely rewarded in years to comes through property value appreciating and equity build-up through paying a mortgage as opposed to rent.