By Blake Dozier
CB Richard Ellis
For the past 18 months or so, bad economic news has dominated the headlines. Many businesses and banks across the country have failed and for some people, times have never been tougher. Conditions are perhaps more challenging than ever before in our lifetime. In spite of that, if your company is still standing today and you desire to own a building for your business to occupy, there is hope.
It is still very difficult for investors to get financing for commercial investment properties, especially larger ones. But what many people don’t realize is that some local banks here in Hampton Roads are still lending money to small businesses to purchase buildings for their own occupancy.
Most local banks are currently requiring 15 to 25 percent down on conventional loans for owner-occupied commercial real estate—a level of out-of-pocket contribution that can keep many business owners on the sidelines. In addition, while banks will often amortize the payments over a twenty-year term, there is usually a rate call after five years in which the rate can adjust. Fortunately, there are other options are out there.
The U.S. Small Business Administration offers a popular alternative called the CDC/504 Loan Program. The SBA’s website describes the program this way:
A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation (Area of Operation). CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
Typically, a 504 project includes: 1) loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost 2) loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and 3)contribution from the borrower of at least 10 percent equity. (Read this and more at www.sba.gov.)
The important things to remember about the CDC/504 Loan Program are that the borrower is only required to put 10% down and the rate is fixed for the duration of the term. This is very attractive to many businesses because of today’s low rates and the ability to retain more of their capital. There are limits to what sizes and types of businesses can qualify for this financing, and most local commercial lenders can quickly tell you if your business qualifies.
For those that do not fit under the qualification rules, the capital markets are a popular option. There are many banks and commercial real estate companies that work with business owners and/or investors to search the open market nationwide (and sometimes worldwide) for alternative sources of financing. They will build an attractive information package on a client’s company and search on the open market for someone to finance the purchase of a building for that company. Owner occupiers are not the only ones to utilize this type of resource. Many investors of commercial real estate rely on the capital markets for sources of debt and equity also, and they have to due to many of these sources drying up for investors in the current environment.
Don’t take the bad economic news as an all-encompassing red light on your company’s growth and expansion. Prices are coming down, and sellers’ expectations are becoming more realistic. There are many avenues through which to achieve your goals. U.S. SBA loans and capital markets are just two sources of creative financing that business owners and investors can utilize today, and the important thing to take away is that buying a building may be more of a reality than you think.
Blake Dozier is a commercial real estate agent in the Norfolk, Virginia, office of CB Richard Ellis. He can be reached at 757.217.1878 or by email at blake (dot) dozier (at) cbre (dot) com.
