"WHEN A business is purchasing, they need to be aware that most buyers need to finance most of the purchase, and to do so they need to apply and be credit approved," said Patrick Annese, vice president and credit solutions specialist at Bank of America.
Since the start of the recession, commercial real estate prices have fallen along with home prices, making it a buyer’s market for businesses as well as residents. Patrick Annese, vice president and credit solutions specialist at Bank of America, has worked with many businesses who have bought their buildings and is well versed on the government programs that can help companies invest in property. Annese took a few minutes to talk to PBN about what businesses need to know if they are thinking about buying a building.
PBN: Do you see this as a particularly good time for businesses that are leasing space to explore buying property to occupy?
ANNESE: Yes, from a traditional economic theory perspective that it’s best to buy low and sell high it would makes sense to look now. Certainly, commercial real estate values are down, in some cases 20 to 30 percent from a few years ago, and rates are near historical lows. Think of it this way: A year or two after every recession people say I wish I had bought “then.” We currently are in the “then” time period. Further, through certain programs we can assist with as much as 90 percent financing for owner occupied commercial real estate.
PBN: What kind of businesses in particular can benefit from owning the building they occupy instead of leasing?
ANNESE: There are many advantages to owning. For example, building equity, retirement planning and cost controls. Most of these advantages are not limited to a type of business. It’s better for business owners to fund their own retirement versus a landlord’s. Currently, we are seeing a lot of opportunities with light and advanced manufacturing and technology and service related companies.
PBN: The Small Business Administration has loan programs specifically designed to help expanding businesses. Can you describe how these loans work and what their advantages are?
ANNESE: The SBA has many programs, but I will highlight just one: The SBA 504 Program. This program is principally used to finance owner-occupied commercial real estate as well as long term fixed assets (i.e. equipment with a useful economic life of ten or more years). With a focus on real estate, the SBA 504 program allows applicants to finance as much as 90 percent of the purchase price or “ground up” construction costs for a new building. The advantages are lower down payment at 10 percent versus the typical 20 percent to 25 percent down payment, longer amortization and lower interest rates. Upon completion of a project, the bank holds a mortgage for 50 percent of the project cost and a SBA backed debenture is held by a local Certified Development Company for up to 40 percnt of the cost at a fixed rate in the low 5 percent range (per most recent sale) for 20 years.
PBN: In Rhode Island, are you seeing much interest from business owners who are leasing in buying property to occupy these days?
ANNESE: Absolutely, credit demand has certainly improved and many buyers who were previously sitting on the sidelines waiting for the economy to improve are inquiring about buying property primarily to take advantage of low interest rates and stable values in terms of raw land and buildings if they find a suitable location for their business.
PBN: If a business is going to buy its building, what are some of the things owners need to be aware of?
ANNESE: When a business is purchasing, they need to be aware that most buyers need to finance most of the purchase, and to do so they need to apply and be credit approved. The analysis of an application will first seek to determine if the applicant is credit worthy, meaning do they have “cash flow,” can they make the required debt service and tax payment every month? Once an application is approved, it will be subject to an appraisal and an environmental analysis, so one needs to account for these requirements before signing a purchase and sales agreement. They will be best served to ask for their bank or credit union for advice on the timeframe early on in the process.