Buy or Rent Real Estate for Your Santa Barbara Business?

Most Santa Barbara business owners and entrepreneurs have asked themselves whether they should (or could) buy the real estate used for their business. There are valid reasons to do each: renting may be the better solution if you are just starting out, or you need or prefer the flexibility allowed by leasing or you lack the cash down payment or credit required to purchase. But if you have a successful small business, have some investable cash and can envision stability in the mid-to-long term, then you owe it to yourself to complete this analysis.

SBA 504 Loan Offers Fixed Rate Financing With Only 10% Down

According to Annette Jorgensen, Vice President and Business Development Officer for American Riviera Bank, the Small Business Administration (“SBA”) 504 loan offers fixed rate financing to "small" businesses with a tangible net worth of less than $15 million and an average, after tax, net income of less than $5 million for the preceding two years. Ms. Jorgensen, who has been working with SBA financing in Santa Barbara for 25 years, says a major advantage of the SBA loan over conventional financing is the required down payment is only 10% of the purchase price compared to the market rate of 25-35% down. The only other critical requirement is that the owner must occupy 51% of the building. American Riviera Bank offers loans of up to $12 million under the program.

You May Be Able to Afford More than You Think With an SBA Loan

The current market conditions of historically low interest rates and the advantages offered through the SBA 504 loan program may make this a perfect time to dive in. The economics, even after the recovery of real estate prices following the Great Recession, may be surprising. Let’s look at a simplified example : 
1) You need a 5,000 square foot office with a market rental value of $2.00/NNN/psf/month, equal to $10,000/month in rent; at a 2% average annual increase in rent, over 20 years, the total rental amount would be little over $2.9 million;
2) If you had $175,000 for a down payment, you could purchase a property for $1.75 million (4,375 sf at $400/sf) and keep your payments at about the same as the 1st year rental payment above for the next 20 years, or;
3) You could spend about the same as the total rent above with the purchase of a $2.13 million property (5,330 sf at $400/sf) with a $213,000 down payment.

Lock In Long Term Fixed Rate Financing, Create Tax Shelter & Build Net Worth

In addition to the pure mathematical calculation above, purchasing will lock in historically low borrowing costs, provide tax shelter through depreciation, grow your net worth with the equity build up and appreciation and create an asset for future income generation. In addition to the positive economics, the benefits of owning include the intangible of the security knowing that you are in control of your own destiny. Don’t sell yourself short. Work with a professional, commercial real estate broker and lender to evaluate your alternatives.

Rick Longpre
Broker, President
Latitude Inc. Commercial Real Estate
Santa Barbara, California

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