Purchasing or expanding real estate to house your business can often go a long way toward controlling operating costs. Businesses are constantly challenged to keep costs under control. Strong oversight of expenses and continual assessment of operational efficiencies help to keep a lid on wayward expenditures. However, leases usually include annual or periodic escalation clauses, utility costs rise (NH electric rates increased 9.8 percent in 2014), and insurance costs can be volatile.
Why Invest in Real Estate?
Investing in real estate for your business is one way to control and manage operating costs, allowing for better business planning. There are programs available that offer an eligible business a fixed payment over a long term. Fixed payments provide certainty, making accurate future planning for business growth more viable.
Ray Dugdale, vice president of commercial lending for Optima Bank & Trust, based in Portsmouth, sees advantages for businesses to own the real estate for their operations:
• Business continuity is not threatened by rising rent, changes in terms or termination of a lease.
• Occupancy costs can be somewhat controlled and are not subject to the cash flow needs of a real estate investment company or landlord that has no financial interest in your business.
• A rental income stream may exist if there is other available space in your building that can be leased out.
• Capital used to make improvements enhances the value of the real estate for the owner, which is generally not the case in a lease arrangement.
• Owning real estate can provide a return on investment for the owner, while leasing generally does not.
It can be difficult for some small businesses to conceptualize such a considerable additional expense. To this end, the U.S. Small Business Administration (SBA) has the Certified Development Company CDC/504 Loan Program, a lending program to assist businesses with purchasing real estate.
In FY 2014, the CDC/504 loan program was used by 72 NH businesses resulting in $77 million in loans, according to Amy Bassett, deputy district director of the NH SBA district office. Most CDC/504 loans for existing businesses require 10 percent equity from the business. More traditional lending programs require at least a 20 percent down payment.
After the down payment, there is a two-tiered lending approach. The bank finances 50 percent of the project, receiving a first lien on the assets being financed. This portion of the loan is required to have a 10-year term. The current interest rate for this portion is between 4 and 5.5 percent.
A CDC, backed by the SBA, finances up to 40 percent of the project secured with a junior lien (a lien in second position). The unique aspect of this financing program permits the 40 percent to be amortized for 20 years at a fixed rate, with a maximum long-term loan of $5.5 million. According to Aldrich, the current rate is 4.5 percent over 20 years or 4 percent over 10 years.
Having a fixed debt service for 40 percent of a loan creates a certainty that other loans do not provide. This portion of the loan also might be assumable to a future buyer of the real estate, with or without the business. (For more information about the CDC/504 loan program, visit www.sba.gov/loanprograms.)
There are other resources to which businesses can turn to invest in business property: private investment firms, U.S. Department of Agriculture, banks, economic development corporations, SBA 7(a) loans and credit unions. Whatever avenue you choose, the first step is to discuss your plans with somebody you trust, such as a certified business advisor at the NH Small Business Development Center, a banker or a mentor. Your most important tools are knowledge of the business and the industry, including the competition, and an understanding of your financial data and potential growth.
Warren Daniel is the Seacoast regional director for the NH Small Business Development Center. For more information, visit www.nhsbdc.org.