There are clear-cut benefits to owning property as opposed to renting or leasing it. These include, but are not limited to, tax advantages and building equity through property value appreciation.
This is true for homeowners as well as business owners.
In the context of commercial real estate, renting and leasing can constrain businesses as it relates to the bottom line and in various operating capacities.
Keep reading to learn more about the potential benefits of owning your own commercial real estate and options for financing owner-occupied commercial real estate.
Starting the owner-occupied commercial real estate conversation
Business owners may want to consider financing owner-occupied commercial real estate to lessen costs and potential operating constraints. As the head of a business, you are already your own boss. If you purchase property for your company, you will serve as your own landlord as well.
If your business owns property, it has a high degree of control. You could, among many other options, choose to:
- Rent owned but unused space to other business owners to boost your working capital. You should consult with your bank to ensure this arrangement would align with your loan agreement.
- Renovate or expand dormant space for your own business.
- Utilize the real estate as a sort of investment property, if the local market significantly favors sellers at some point in the future — and you fulfill any occupancy and length of ownership requirements in your loan agreement.
What is owner-occupied commercial real estate?
Many business owners are familiar with the traditional structure of leasing and renting, in which monthly payments are made to a landlord. In this approach to commercial real estate, business tenants have to compromise with other stakeholders.
It can be difficult or impossible to rent adjacent space to expand the company’s operations, especially if it is already occupied. The landlord may decide to sell the property. This represents additional risk, as the new landlord may increase rent or decide to not renew an existing lease.
The opposite framework is owner-occupied commercial real estate (OOCRE). This is an arrangement in which the business owns the building or space it occupies for commercial and operating purposes. Owners may purchase the property outright or take out a commercial mortgage to access needed funds.
In this situation, you have far more control over the property. It is generally easier to make changes that support growth. Renovating the building to support a larger suite of products or services offered, for example, is a much more achievable goal. As you build equity in the property, your business gains another valuable asset it can use in the future.
Many startups or small businesses begin by renting. but as they grow, these companies' needs may change, or they may experience rising rent prices that negatively impact profit margins.
The benefits of OOCRE
The benefits of OOCRE are particularly attractive in comparison to renting.
Typically, the benefits of OOCRE can include:
- Tax advantages: Renters have little ability to draw an advantage from their space for tax reasons. Commercial owners, however, can benefit by deducting the interest on a commercial real estate loan or writing off other building-related expenses and investment. These individuals should always consult a tax advisor before making decisions.
- Cost stability: Rent is a variable cost, which can present a cash flow problem when increased. Rent increases may come at inopportune times or outpace even the average rate of inflation. This risk can be mitigated as an owner-occupier.
- Asset diversification: Real estate itself is a valuable asset to own and can help diversify your business's holdings by building equity in commercial real estate.
Financing owner-occupied commercial real estate
There are many options available in terms of property loans to support goals related to owner-occupied commercial real estate, whether your business is making an initial purchase, adding to its portfolio or refinancing.
Financing requirements for such business loans may include:
- A maximum loan-to-value cap.
- A minimum credit score rating.
- A certain debt service coverage ratio.
Besides a conventional loan for commercial owner-occupied real estate, the U.S. Small Business Administration (SBA) offers the SBA 504 loan program for commercial real estate acquisition.
Depending on the borrower’s business, other options may be good alternatives. A bridge loan, for example, can help to address short-term funding needs before a long-term agreement is reached. If you will launch a business in a rural area, or your business currently operates or plans to move to one, the U.S. Department of Agriculture (USDA) may provide support. A USDA loan can offer competitive rates and terms, along with large total loan amounts and other benefits.
Businesses that already own their own building and refinance the property may see additional advantages, such as a lower interest rate or a cash-out payment. It is important to carefully review and discuss such decisions with accountants and tax advisors to ensure a positive outcome, but the right choice at an opportune time can lead to significant advantages.
Interested in learning more about financing owner-occupied commercial real estate and what advantages your business can gain? Contact the team at Comerica Bank today for more information.
