With interest rates still very low, it
could be an opportune time for
businesses to purchase the space they occupy. Not only does owner-occupied commercial real estate safeguard
against dramatic rent increases, but it also
provides a tax advantage.
“One benefit is the depreciation. That’s
the depreciation you don’t get when you
lease but you do receive when you buy,”
explains Joe Yurosek, senior vice president
and regional group manager at Comerica
Bank.
Yurosek spoke to Smart Business about
commonly overlooked real estate financing options, the pros and cons of fixed and
variable rates and why a business that
already owns property might want to consider refinancing.
What factors should a CEO or business owner
consider when looking at commercial real
estate?
No. 1, does the CEO or business owner
want to have an opportunity to participate
in any price appreciation of a building
which they wouldn’t participate in if they
leased it? That’s an advantage that should
be taken into consideration when deciding
whether to lease or buy.
The second benefit to owning real estate
is that there are some tax advantages, as
the building itself is depreciable. This
means, the owner gets to depreciate the
building and the improvements over the
useful life of the building, which offsets an
owner’s taxable income.
A third benefit to owning real estate is
securing your location beyond the time
that may be available with a lease agreement. This may be very important when
business owners need geographic-specific
locations near ports and freeways or simply need to secure parking or storage
space. It’s also important for growing companies to secure contiguous properties to
make room for manufacturing or distribution growth. Non-adjacent properties can
lead to operating inefficiencies. When you
own a property, you guaranty yourself the
security of a long-time location.
What are some methods that businesses can
use to finance real estate?
The most active method used today is
fixed or variable rate bank or institutional
debt financing. Bank financing typically
involves up to a 75 percent loan to value on
purchased property with a mortgage style
amortization. In this case the buyer is
required to put up 25 percent of the purchase price. A popular alternative product
that is really attractive would be tax free or
taxable industrial revenue bond financing.
There are also Small Business Administration products that offer benefits as
well, including programs that require as little as 10 percent down. Also, owners
should contact their local municipalities,
because often they have economic development programs and are willing to pass
on financing support by way of low-cost
money or loan-guaranty programs.
What types of businesses can benefit from
industrial development revenue bonds?
There are some limitations on eligibility.
Usually you have to be a manufacturer, but
you can also be a nonprofit organization.
But, if you qualify, tax-free rates further
reduce your borrowing costs.
With respect to revenue bond financing,
the buyer will be utilizing the credit strength of the bank or financial institution
that issues the letter of credit in support of
the revenue bonds. The bank then takes a
deed of trust on the subject real property.
What are some factors that a business owner
should consider when deciding whether to
use a fixed or variable rate?
The buyer’s tolerance for risk is one factor. When you choose a fixed-rate loan versus a variable-rate loan, you are hedging
against increasing rates. Obviously, if rates
don’t move or if rates decline, buyers are
better off with a variable product.
Another factor would be a business’s ability, or lack thereof, to absorb increased
interest costs on a variable rate loan. Most
business owners like to know what their
fixed costs are so they prefer to lock in
rates or use interest rate swaps to trade
variable rates for fixed rates. By using rate
swaps, a business owner can effectively
create a fixed rate.
Alternatively, variable rates do allow for
repayment flexibility. Some owners prefer
to pay off their loans early. A variable rate
gives owners flexibility to make early
repayments.
What advice would you give to a business
owner who wants to refinance the property
that the business already owns?
Today’s rates are still at low levels, so a
business with a variable-rate real estate
loan might want to lock in a fixed rate or
swap a variable rate for a fixed rate and
reduce future interest rate risks. It’s still a
good time to lock in and move from a variable-rate to a fixed-rate loan.
Call your banker and get rate quotes. Ask
your banker about fixed products and
swap products. Some owners may be in a
position to also take advantage of existing
price appreciation when refinancing. This
could be a good time to cash out by refinancing the building and using the additional proceeds to reinvest in the business.
Refinancing is an alternative to selling a
building if new capital is needed.
JOE YUROSEK is a senior vice president and regional group
manager at Comerica Bank. Reach him at (562) 590-2561 or
[email protected].