Guest post by Richard Gray, Senior Vice President, Commercial Lending, Bank of American Fork
It’s no secret that the past few years have seen drastic changes in the real-estate market. Those looking to sell property face an uphill battle with years’ worth of inventory with which to compete. On the other hand, those seeking to purchase real estate have new opportunities to take advantage of as the economy continues to recover. Thankfully for local businesses, some of the greatest opportunities currently lie in the commercial real-estate market.
Though this recession has been toughest on small businesses, there is a silver lining: buyers can now access prime real estate for much less than a year or two ago, particularly in the commercial market where vacancy rates are up. Cash-starved owners and foreclosure sales have resulted in an unusually high volume of commercial properties priced very low. While there’s still abundant supply, small business owners should seriously consider whether now is the right time to purchase commercial space.
One of the best financing options for Utah’s small businesses seeking to purchase or construct owner-occupied real estate is Small Business Administration, or SBA loans, which are specifically designed to help companies grow and prosper. They are ideal financing vehicles for office buildings, warehouses, retail outlets and special purpose-type facilities, such as restaurants, lube shops or car washes. And thanks to the federal government’s efforts to stimulate the economy, these types of loans are more plentiful than ever.
Because SBA loans are partially guaranteed by the government, most banks are willing to make them, even to businesses that may not qualify for a traditional loan. SBA loans are also less capital-intensive, requiring just 10 percent to 20 percent down, versus the 30 percent to 35 percent down needed for traditional loans.
Business owners can leverage current commercial real-estate rates to plan for their future by purchasing a building they can grow into. As long as the business occupies at least 51 percent of the building, it can qualify for an SBA loan. Under this scenario, a company can buy the property now at lower-than-normal costs, lease out the other 49 percent, and use the rent it receives to cover part of the building loan payment.
While SBA loans are the answer for many companies, some small-business owners may want to consider obtaining a personal loan to purchase a building, then renting the building back to the business, as one of our customers recently did. The company had outgrown the office/manufacturing/warehouse building it had been renting. The owners found a new facility and, because they were seeking to use the building for the long term, considered whether or not they should purchase the building. Their main concern was the consequence of taking capital out of their business to make the purchase.
After analyzing the owners’ own finances, I recommended they consider purchasing the building under their personal names and then have their business rent it from them. This model allows the company to utilize its capital to grow the business, while giving the owners an opportunity to increase and diversify their personal wealth with commercial real estate.
When the opportunity is right, small businesses and owners can greatly benefit by owning their own commercial property. The money they pay toward a real-estate loan each month goes towards building equity instead of lining someone else’s pocket. They have more control over their environment and can put money into a long-term asset that meets their specific needs instead of improving someone else’s building. Ownership also insulates companies from higher rent payments, which are likely to surge as the economy recovers.
If you’re worried your business may be too big to qualify for an SBA loan, know that a small business is defined as having less than 500 employees and less than $7.5 million in annual revenues (depending on the industry). This means 95 percent of Utah companies are eligible.
While the economy has produced challenges for everyone, it has also created one of the greatest buyers’ market for commercial real-estate in recent history. There are many attractive options for small businesses. If you are qualified to purchase commercial real estate, this might be the ideal time to invest in yourself and your business.
Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s largest community bank with 12 branches across Salt Lake and Utah counties. Located out of the bank’s Murray office, Gray has assisted local small businesses obtain SBA funding for over 25 years.