Posted: Monday, May 23, 2016 – 3:41 PM
By Patrick Nygren
One question that may arise for many small business owners in 2016 is whether to buy the property they currently lease. If you’re one of those business owners who decides it’s in your best financial interest to buy, here are a few things you should consider:
If you occupy at least 51 percent of the property, you may qualify for SBA financing—a great financing option available for business owners in today’s market. SBA loan programs provide long-term financing to small businesses needing to acquire major fixed assets, including leased buildings. The two main advantages of an SBA loan are:
1. You can purchase the building with as little as 10 percent down.
2. The term of the loan can be as long as 25 years. The long amortization period may make your payment much lower than your current rent payments.
Some small business owners think they can’t qualify for a loan because they’re either unable to provide a down payment or have too much other debt. However, with SBA financing a business owner can make a 10 percent down payment and derive that 10 percent from a number of sources they may not have considered. For instance, money that you’ve spent on capital improvements to your leased space may count toward a down payment, as well as a family gift or a seller-carry note. It also may be possible to refinance some of your other debt into a real estate acquisition loan—further improving your cash flow. In addition, working capital for growth and expansion can be added to certain types of SBA loans.
If your goal is to generate income from your property while also using the space for your business needs, think about buying more business space than you’re currently leasing and renting the unused portion to another business. Not only will the other business help you pay off the mortgage on your building—it also could draw foot traffic your way.
When considering this option, it’s important to keep in mind that the moment you lease space to another tenant, you become the landlord. Anything that goes wrong with the building, including plumbing, heating or water damage, becomes your responsibility to repair. Make sure you’re ready for the added responsibility before you rent the space.
Although you may write off the rent you currently pay while leasing your place of business, there are other tax benefits of property ownership. For instance, you may be able to deduct mortgage interest, depreciation and property taxes as an owner.
If you’re renting part of the space, landlord deductions may be available to you, as well. Check with a tax professional to determine the tax implications of owning property for your business.
If your business is located in a popular and growing area, it’s likely local rents will continue to increase. One way of controlling the fixed cost of your office space is to own it so you know precisely how much your payments will be for the length of the mortgage contract. If you decide to lease part of your space to another business, you may also collect those increased rent payments. Moreover, if you purchase versus lease space, your business will benefit from any appreciation in the value of the property.
Equity as a property owner benefits you in two ways. As the value of the property increases and the amount of your mortgage decreases, your property gains more equity, resulting in a greater profit if you sell. This equity also gives the actual business more worth, meaning that you may be able to borrow against the equity to fund future growth. It’s important to note that the downside of counting on equity is no one can see into the future to determine what the value of your building in the years ahead.
Ultimately, there are many factors every small business owner needs to consider when deciding whether to buy or rent a business facility. Before committing to purchasing your business property, seek the support of a financial advisor to discuss all your financing options and help you determine what makes the most sense for the success of your business.
Patrick Nygren is president for Wells Fargo Los Angeles region. He may by reached at Patrick.A.Nygren@wellsfargo.com.