should i buy a building for my business?
TRANSCRIPT
Should I Buy a Building for My
Business?Presented By:
Disclosures
Should I Buy a Building for My Business?
The information presented is not an offer or commitment. Rates, terms and conditions vary based on property type/use and may be changed without notice. All transactions are subject to submission of a formal application, underwriting and written approval. Approval terms may vary.
IRS CIRCULAR 230 DISCLOSURE:Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.
What We’ll Cover
Should I Buy a Building for My Business?
Is it cheaper to rent or buy? Overview of local market conditions Tips on finding the right building for your business Qualification criteria Types of financing available Tactics for managing deductions and appreciation How ownership structure can effect the management of your purchase
Finding a Building
Daniel BakerSenior Associate with CBRE, Inc.
• 8 years in commercial brokerage with a focus on investment sales• 75+ commercial escrow closings since 2010
Should I Buy a Building for My Business?
Charles Schwab AgreeYa Solutions
The Wheeler Company
Recent owner-user transactions
What is the True Costs of Ownership?
Should I Buy a Building for My Business?
What is the cost difference between Leasing and Buying?
Lease Vs. Buy Analysis
Break the numbers down to an “apples to apples” comparison on a monthly basis.
What is the True Costs of Ownership?
Should I Buy a Building for My Business?
Office ExampleLeasing+Rent – Full Service Gross+Base year pass-throughs
Buying+Mortgage+Taxes+Insurance+Utilities & Janitorial+Landscaping+Association Fees+Building Reserves+Property Management
If the Buy number is less, continue to research purchase options.
Researc
hin
g
the M
ark
et
Should I Buy a Building for My Business?
Find a Knowledgeable BrokerThis is free advice - Commissions are paid by
Sellers
Interview Brokers that specialize not only in your product type (retail, industrial, office), but have specific
experience working in your geographic area
Review Sale & Lease
Comparables
Path of Development
Loopnet & CoStar
Market Trends
??? ?
Should I Buy a Building for My Business?
???
? ?Questions to Contemplate
Geographic location Space usage Environment Future business projections Parking requirements Proximity to public
transportation Power requirements
Zoning Demographics Technology capabilities Security Building signage / visibility /
identity Space efficiency
FurnitureFixtures
Equipment Move
1-2 weeksPlans, Permitting and
Construction 4- 24 weeks
Escrow Period and Financing10-16 weeks
Negotiations and Contract Review 3-6 weeks
Researching the Market 4-12 weeks or longer
Should I Buy a Building for My Business?
Expe
ctat
ions
and
Tim
ing
Total – 60 Weeks
Cast a wide net Don’t rule out properties too quickly It’s rare to find the perfect fit Tenant improvements and aesthetics
can be changed Zoning / Permitted uses can be
altered
Should I Buy a Building for My Business?
Exit StrategyBuying a building is a business/investment decision and most often a long-term
investment.
Always think Exit Strategy. If I had to sell tomorrow, is the property
widely marketable? If possible, do not overly specialize the usage
of a property.
Retirement Vehicle Upon retirement, sell your business, but
retain the real estate with a long-term lease.Plan for the worst and hope for the best
Should I Buy a Building for My Business?
Market Conditions
Current Future
Lease Rates
Real Estate Values
Interest Rates
Financing a Building
Should I Buy a Building for My Business?
Matthew PlanchonVP, Relationship Manager with American River Bank
• Worked as a commercial lender since 2006
• Booked over $35 million in new CRE loans over the past 3 years
Should I Buy a Building for My Business?
Qualification Criteria for a Commercial Loan
Profitable Business
Experienced Owner
Sufficient Cash Down
Payment
Business Credit
History
Historical Revenue Trends
Net Profit
Debt to Net
Worth
Business Criteria
Equity in Business
Global Cash Flow
Personal Credit History
Liquid Assets
Debt vs. Equity
Personal Cash Flow
Debt to Income
Individual Criteria
Business Criteria
Should I Buy a Building for My Business?
Is it Better to Rent or Buy?Inputs Own LeaseBuilding Sq Ft 7,000 1st D/T Amount 500,000$ Monthly Rent Payment 12,320$ Owner Occupied Sq Ft 7,000 2nd D/T Amount 400,000$ Maintenance 133$ Rented Sq Ft - 1st D/T Payment 2,923$ Taxes 917$ Unrented Sq Ft - 2nd D/T Payment 2,535$ Insurance 253$ Price PSF 160$ Taxes 917$ Purchase Price 1,000,000$ Insurance 253$ Financing Type SBA 504 Maintenance 133$ Down Payment % 10.000% Monthly Cost to Own 6,761$ Down Payment $ 100,000$ Rent Received -$ Closing Costs 2.000% Net Monthly Payment 6,761$ Net Rental Payment 13,623$ 1st D/T Interest Rate 5.000%1st D/T Amortization 25 Tax Impact Tax Impact2nd D/T Interest Rate 4.520% Rent Received 65,494$ Rent Paid (147,840)$ 2nd D/T Amortization 20 Interest Paid Y1 (approx) (42,087)$ Taxes (11,000)$ Insurance (annual) 3,036$ Depreciation (approx) (36,364)$ Insurance (3,036)$ Taxes (annual) 11,000$ Taxes (11,000)$ Maintenance (1,596)$ Maintenance (annual) 1,596$ Insurance (3,036)$ NNN Lease Rate 1.76$ Maintenance (1,596)$ Annualized 21.12$ Total (28,589)$ Total (161,876)$
Owning would save 6,862$ per month in occupancy costsOwning would decrease personal taxable income by 28,589$ Owning would increase C-Corp taxable income by 82,346$
Should I Buy a Building for My Business?
Conventional Financing Example
Purchase Price 1,000,000$ 100%Down Payment 300,000$ 30%Loan Amount 700,000$ 70%Loan Term 5 or 10 yearsAmortization 25 yearsLoan Fee - 0.50% 3,500$ Documentation Fee 500$ Rate 5.00%Floor 5.00%Prepayment Fee 5%,4%,3%,2%,1%Estimated Monthly Payment 4,092$ Total Estimated Loan Fees 4,000$
Conventional Financing
Should I Buy a Building for My Business?
SBA 504 Financing Example
Purchase Price 1,000,000$ 100%Down Payment 100,000$ 10%Bank Loan 500,000$ 50%SBA Loan 400,000$ 40%Bank Loan Term 5 or 10 yearsSBA Loan Term 20 yearsBank Amortization 25 yearsSBA Amortization 20 yearsBank Loan Fee - 0.50% 2,500$ SBA Loan Fee - 2.67% + $2,300 12,980$ Bank SBA Fee - 0.50% 2,000$ Bank Documentation Fee 500$ SBA Documentation Fee -$ Bank Rate 5.00%SBA Rate 4.52%Estimated Blended Rate 4.78%Bank Floor 5.00%SBA Floor N/ABank Prepayment Fee 5%,4%,3%,2%,1%SBA Prepayment Fee Declining ScaleEstimated Bank Payment 2,923$ Estimated SBA Payment 2,535$ Estimated Total Payment 5,458$ Estimated Bank Fees 4,000$ Estimated SBA Fees 12,980$ Estimated Total Fees 16,980$
SBA 504 Financing
LTV no greater than 90% (aggregate debt: bank + SBA)
LTC no greater than 85% (total project costs: purchase + renovations)
Property debt service coverage ratio minimum of 1:1 on both the bank and SBA debt
Should I Buy a Building for My Business?
Loan Process and Sample TimelineLoan
Application /Financial Review
7+ Days
Expression of Interest Letter
7+ Days
Obtain 3rd Party Reports 30+ Days
Loan Approval7+ Days
Loan Closing7+ Days Total:
60-90 days
Take note! Submitting all requested documents and completely filling out application documents will expedite the timeline!
Benefiting from your Building
Should I Buy a Building for My Business?
Isaac Zipp, CPATax Manager with GALLINA LLP• Isaac has been working
in public accounting since 2005. In addition to tax compliance, Isaac specializes in business planning and consulting to help advise business owners to minimize overall taxes and help them achieve their financial goals.
GALLINA LLP is an award winning full-service regional accounting firm with locations throughout the Western United States.
Our seasoned professionals work to maximize tax credits and minimize liabilities today and in the future, to help preserve as much wealth as possible.
Should I Buy a Building for My Business?
Tax/Financial Benefits
Potential for increased cash flow and reduced tax liability.
The operating entities rent payments typically stay the same or decrease.
The real estate holding can begin to accumulate cash & equity while generating losses.
Losses can potentially offset other income and reduce the owners’ tax liability.
Should I Buy a Building for My Business?
Rental Losses• How to deduct the amount paid for the property• Typically taken over a 39 year periodDepreciation
• Break up the building into different asset categories• Front load the depreciation during the first 15 years
Cost Segregation Studies
• Passive Loss Rules• Self-Rental RulesDeductibility
Should I Buy a Building for My Business?
Tenant Improvements
Who should pay for tenant
improvements (TIs)?
The operating entity or the real estate
entity?
Stock basis issues
Impact on calculation
of FMV rent
Impact on new
additional taxes
Should I Buy a Building for My Business?
Ownership Structure
Limited Liability Company (LLC)
• Liability protection for all members
• $800 annual state tax• Gross receipts fee for
revenue in excess of $250k
Limited Partnership
• Liability protection for limited partners, not general partners
• $800 annual state tax
General Partnership/Personal
• No liability protection• No state tax
QuestionsMatthew [email protected](916) 231- 6137
Isaac [email protected](916) 638-1188
Daniel Baker [email protected](916) 492-6963