Increase Profitability

From Renter to Owner: Using an SBA Loan to Buy Real Estate

From Renter to Owner: Using an SBA Loan to Buy Real Estate

Rental expense can be a significant cost factor for many businesses. For businesses whose location contributes to their competitive value, the options to reduce rental expense may feel limited.  

Laura Thomas’ childcare center was thriving. Both her fulltime and afterschool programs were filled with waiting lists of interested parents. Yet, she was still not meeting her profitability goals. Laura knew that her long term teaching staff was vital to her mission and to her success, so reducing salary expense by tinkering with staffing ratios or skill mix was out of the question.

Her rent, on the other hand, had risen with every lease renewal and seemed out-of-line with the value of real estate in the area. Laura wondered if she could reduce her monthly expense if she found the right property for sale. She felt limited by the fact that she knew she could not venture far from her current site. Parents planned their traffic patterns and routines around her current location. She consulted her banker to better understand her options for financing real estate and how that would translate to a monthly mortgage payment. She knew property in her immediate area was pricey and might require more of a cash payment than she could easily access.

Her banker presented the SBA 504, a federal program administered by regional, national and local commercial banks, as a viable option. The SBA 504 loan program would fit her needs perfectly since her business was an eligible small business and would occupy the space to operate its business. In addition, the down payment/equity requirement was only 10 percent. Laura began shopping with a real estate agent for the right property. She found a building that could be easily outfitted for a daycare center with space to grow in the future. Laura’s banker explained that the SBA 504 required her to occupy at least 51 percent of the property, but that she could lease the other portion of the property for rental income.

Laura used her cash reserves for the 10 percent down payment she would need for the $2.5 million land and building purchase price. She would occupy 60 percent of the space and lease the other 40 percent - easily meeting the SBA minimum. Her banker helped her quickly pull together the documentation needed so that her contract was accepted, and the seller accepted the offer. The rental income generated and the rental expense saved quickly repaid her cash reserve.

Laura was able to put the SBA 504 to work because she had a clear understanding of her business goal. She and her banker had identified her cost drivers and understood what a real estate investment would do to improve her bottom line.  She was able to submit financial statements illustrating how the cost for accessing capital would pay off in a reasonable number of months. Laura and her banker began with a position on the:

  • Required capital investment
  • Financial benefit from the new capital
  • Incremental, ancillary expenses associated with implementation – moving costs, renovation expenses to bring new property to daycare code, continued rental expense during renovation, changes to property taxes, property insurance, etc.
  • Changes over time in the cost and impact of financing
  • Options for capital and associated terms if the SBA did not work out

For business owners, Laura’s experience should prompt the question:  How might your business benefit from a capital infusion for real estate?

Many business owners consider themselves in anything but the property management business. They fail to consider how investing in real estate might offset rental expense. There are guidelines about the percentage of the space you purchase must be used for your primary business, but many owners find that a real estate investment makes financial sense.

Talk to your advisors about how you might use capital to reduce rental expenses and construct a simple, back-of-the-envelope plan to meet your business goals.  This simple approach will equip you with the information you need to explore options and assess your fit with the most attractive financing programs.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.