How Small Business Owners Can Beat Rent Increases: The SBA 504 Loan
Small businesses that rent industrial space in California, Nevada, and Arizona are in some of the most expensive commercial markets in the U.S. If you’re the owner of one of these small businesses, you know the uncertainty of being subject to rent increases, especially in today’s high inflationary times. That’s why you should stop writing rent checks to your landlord, and start making rent payments to yourself. Owning your building is the solution. And the U.S. Small Business Administration (SBA) 504 loan program provides the financing to make it possible.
The SBA 504 loan low down payment of only 10% and a below market fixed interest rate makes the purchase more affordable than you might think. Owning your building will help you get control over occupancy costs as well as provide additional benefits of real estate ownership.
Industrial rents are high and show no signs of easing
Industrial real estate is at a premium and rents are likely to continue to rise. For example:
- “Although there has been a slowdown net absorption to begin 2022, this has not stopped landlords from increasing asking rental rates with the overall average rental rate regionwide now increasing to $1.20 per square foot (psf), up 19% year-over-year.” Savills Q1 2022 -Industrial, Southern California
- “The Phoenix industrial market continues to be one of the hottest in the country with a record amount of product under construction and asking rental rates at all-time highs.” Savills USA Research & Insight
- “Asking rents were up 8 percent last year nationally, and that includes less trafficked locales in flyover country.” The Real Deal, reported February 2022
When you rent, many leases allow the property owner to increase rents every year, and at the end of the lease term, you have no control over the amount of the rent increase. You may also be at risk if the owner decides to sell the property.
Among the significant benefits you gain when you own your property through the SBA 504 loan program are:
- Monthly principal and interest payments for the SBA 504 loan stay the same over the life of the loan, generally 25 years (as opposed to rent payments, which likely increase annually, or variable-rate loans, which fluctuate with interest-rate increases).
- You gain the long-term investment benefit of owning an asset that increases in value over time, including potential tax benefits, and eliminate the risk of a landlord selling the property that houses your business.
- If you take title in your name individually and lease the building to the business, you have the option to in the future sell the business and retain ownership of the building as well as rental income from the new owner.
- Depending on the property, you may be able to rent additional space in your building to generate additional income.
The SBA 504 loan program helps more business owners get funded
The SBA 504 loan program
- The down payment to purchase your property can be as low as 10%. (Single-purpose facilities) or start-up businesses may require a slightly higher down payment for SBA 504 loans.)
- The SBA 504 loan includes below-market fixed-interest rates with payments fully amortized over 25 years, so you always know what your payment will be.
- There’s no maximum project loan amount so it’s flexible to meet your needs.
- There’s no additional collateral required.
- Closing costs and other soft costs can be added to SBA 504 loans, meaning that there’s less cash required up front.
How SBA 504 loan funding works with your down payment and a bank partner’s loan
SBA 504 loans certified development company (CDC), along with funding from a partnering bank, and your down payment (also known as “owner equity”), which is just 10% for most projects. Here’s an example of how that looks for a $2 million deal:
- Owner down payment of 10%: $200,000
- The SBA 504 loan covers 40%: $800,000
- A conventional loan from a bank covers 50%: $1,000,000
Take a look at these success stories to learn more about how small business owners like you used the SBA 504 loan to secure their properties:
- Zack/de Vito Architecture + Construction, San Francisco, CA
- PanDia Seeds, Inc., Ventura, CA
- Tacos Chiwas, several locations in AZ
- Desert Gymcats, Las Vegas, NV
Explore the SBA 504 loan option today
To learn more, contact TMC Financing (TMC) today. TMC is a non-profit certified development company (CDC) with a mission to promote economic development and job creation for small businesses in California, Nevada, and Arizona. (If your small business is located outside of our service area, the SBA Lender Match tool can help you find a lender near you.)
Since 1981, TMC has secured more than $10 billion in SBA 504 commercial real estate financing for thousands of small businesses, and our team is excited to show you the ways that an SBA 504 loan can help you, too.