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SBA loans turn business renters into owners

Are you renting your office, warehouse, or other business space?  Would you prefer to purchase or to build, to customize your surroundings, and to possibly pay less in mortgage than you are paying in rent?

If your answer is “yes” to any of these questions, there are two government-guaranteed loan programs that you should know about:  Small Business Administration (SBA) 504 and 7(a).  They are helping small business people go from being renters to being owners.   

Currently, there is an unusually high amount of vacant space in office buildings and warehouses, often in prime locations.  At the same time, commercial real estate prices and business loan interest rates are both at historically low levels.  This means now is probably the best time in the past 30 years to buy real estate. 

That’s exactly what many small business people are doing with SBA loans.  One important reason is that down payment requirements for these loans are often as low as 10 percent to 15 percent compared to the 25 percent to 40 percent required for conventional commercial property loans. 

While SBA down payment requirements may vary among banks, a larger down payment – for example, 20 percent – can facilitate the approval process.     

A popular source for SBA loans are local community banks because business owners spend less time waiting for their money.  Loan decisions at these banks are made locally, so approvals and closings typically happen within weeks rather than months compared with large regional or national banks.

For business owners, the benefits of owning their place of business include building equity with the principal portion of every loan payment; saving on income taxes with depreciation deductions; and increasing net worth as property values rise.       

Among the requirements of the SBA 7(a) and 504 loans is that the borrower must occupy the property.  This makes the loan more attractive for banks because owners that occupy the building space are more likely to pay back their loans than owners of investment property.

For office buildings or other buildings that have tenants, 51 percent or more of the space must be occupied by the owner in order for the building to be eligible for an SBA loan. 

It’s worth noting that SBA 504 loans are the ultimate example of “public-private” financing – with 50% of your loan being a first mortgage provided by the bank, 40 percent being a second mortgage guaranteed by the SBA, and 10% provided by the borrower as a down payment. 

A wide variety of industries qualify for SBA loans, ranging from retailers such as restaurant owners to professionals such as doctors, lawyers, and accountants.  Among the government’s requirements are that the business must have less than $5 million is annual income and no more than 500 employees.

SBA loans are typically for 20 to 25 years at competitive interest rates.  The funds can be used to purchase, expand, renovate, or construct an owner-occupied commercial building – or even to refinance eligible existing business debt.

Loan proceeds can also be used for “soft” costs such as architectural and engineering fees, permits, and closing costs. 

An “SBA Preferred Lender” can minimize your paperwork and expedite your loan approval.  So if you want to buy or fix up and renovate your business property, now is the time – before real estate prices, interest rates, and improvement costs start going up.

Navin Shah is Chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers.  He is also Vice Chairman of Embassy National Bank, a community bank in Lawrenceville that he helped establish in 2007 and has become one of the leading SBA lenders in the southeast.