So you have been pouring all your efforts into building your business for several years now. You have not only survived, but have been forced to think about what you are going to do if the business continues to grow. You started out in a space that you will soon be outgrowing and you are eyeing when your lease is coming due. Your success is bringing forward some real important questions:
Should I search for a larger space to lease?
Should I start looking for a building to purchase?
For many business owners, the purchase of their own building is a very intelligent financial decision. Here are some of the benefits of owning your own building:
- You can find a building which both suits your needs and allows you room for expansion:
Finding the right building that you can grow into for many years is important. Either purchasing or building your own building allows you choose where you want to be and to build out to exactly fit your growing business. Also, the location in many cases is crucial. A building which is well suited for your growing employee rank is important as well as one that is ideally suited for your business model and customer base.
- You can spread out the debt service on the building debt for 20 years.
When you buy a building, you can set up financing that is repayable over a much longer period of time such as 20 years. This allows you to get increased space in many cases at a lower cost. It is very important to look at what your debt service would be with the new building including property taxes, insurance and other ownership expenses to be well informed going in. One thing that many business owners do initially is lease a portion of the new building to another tenant or multiple tenants to help with the debt service if they do not need the entire space. If things are structured right, this can take a huge bite out of the debt service requirements. This allows you to have control over your occupancy expense for the indefinite future.
In regard to the financing, Flagship Bank can guide you through this process. There are several conventional real estate financing programs out there for many companies with as little as 20% down. In addition, there is an SBA option, the SBA 504 program for qualifying properties only requires a down payment of 10%. This is a very good option for business owners to both purchase and improve commercial real estate properties. This program is well suited for many types of buildings such as warehouses, office buildings, retail storefront, and office condominiums. More special single purpose types of property may require a slightly larger 15% down payment. In a typical SBA 504 loan, the lender finances 50% of the acquisition and rehabilitation cost. Then the SBA finances 35 to 40% of the cost with a subordinated debenture. The interest rate on this subordinated debenture is very competitive and fixed for twenty years. There are some additional SBA requirements that need to be met in regard to size, percentage of occupancy, and job creation. Furnishings, fixtures, leasehold improvements, equipment and lending fees can be included into the SBA 504 financing package. There are also some prepayment penalties on the SBA 504 financing portion.
Flagship Bank offers both Conventional and SBA 504 real estate financing options. We will look at your situation and make suggestions on what, in our professional opinion, would fit your needs the best.
- Owing your own building lets you control your rents:
When you own your own building, you do not have a landlord raising your rents continually throughout the duration of your lease or at renewal time. You control the rents and if the building is cash flowing at the current level, you have more flexibility in maintaining the rents without any increase. This allows you to keep that much needed cash in your business operation to fund growth. In most cases, leaving the cash in your business to fund future growth provides much more future value from an increased business valuation.
- Appreciation of your building and pride of ownership
In many cases, over time, your building will increase in value. This investment potential is an additional positive contributing factor to ownership. Some business owners may at some time decide to sell their business but keep the ownership of the building. This then can also have the potential of adding to their personal cash flow in retirement with a solid and consistent ongoing financial return on investment.
We can help put some thought and analysis into it!
Over the years, we have financed many buildings for our customers and can say from experience that it is rare for the business owner to say “I wish I would not have bought my own building!” We believe it is a smart financial decision for many business owners and look forward to any opportunities to finance more of these purchases.
We have invested in expert people, systems, and industry knowledge that make us a market leader in a field often dominated by very large banks. If you or your Minneapolis/St. Paul Metro Area closely-held business, nonprofit organization, or real estate company could benefit from a bank that delivers specifically for you, please give us the opportunity to review your banking needs. We are committed to making our clients successful. Your success is our business!
Flagship Bank Minnesota is a Member FDIC and Equal Housing Lender.