Buy a building with an SBA 504 Loan & beat high lease rates from Commercial Landlords

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“Skills can be taught. Character you either have or you don’t have.”


Apr 6, 2016  William Gary, MBA, MIM

Drop your company or professional firm’s “effective” lease rates dramatically. Be your own Landlord with the help of an SBA 504 Loan. Today’s low interest rates for a purchase can help you, by a wide margin, to beat the high lease rates offered by Commercial Landlords.

In most Industrial Submarkets of Metro Denver/Boulder (and in many other cities), vacancies are at record lows and NNN rental rates are very high for Warehouse and Flex/R&D Tenants. If a creditworthy Industrial or Office Tenant can find a viable building or commercial condo space to purchase, then buying with an SBA 504 Loan could cost-wise beat the heck out of leasing space.

One of our Flex/R&D Clients received a national Landlord’s offer to renew its lease for five (5) years at $11.04/SF triple net (“NNN”) per year. While we objected to the Landlord’s too-high proposal, our research and multiple forays into the market ended up validating it (reluctantly) as a fair market lease renewal deal in Denver / Boulder’s overheated Industrial/Flex Market.

But we didn’t accept the Landlord’s bad news or the very tight Industrial/Flex Market lying down. We persevered, broadened our search parameters, toured more buildings for lease and eventually found an excellent Flex/R&D opportunity for our Client to purchase. Our Client’s banker with Chase was a huge help and supported the decision to purchase by offering our Client an SBA 504 Loan.

Buying effectively lowered our Client’s annual rental rate by 37.4% to $6.91/SF NNN versus renewing for five (5) years at $11.04/SF NNN.

As our client said, ‘This is a true no-brainer.”

CAVEAT: Our Client was very wise and avoided the #1 Mistake that most Commercial Occupiers make: starting their evaluation and search process too late. In this case, our 18,000 SF Flex/R&D Client started the lease renewal process with us eleven (11) months before its lease expired, not thinking at all that it would end up buying a Flex building. Starting early enough gave us and our Client long enough to consider all of the lease options available and then try out the “What If” Scenarios of buying.

How soon an Occupier should start depends on its size, zoning needs and any special needs, such as utility requirements for electricity, gas, water and Internet/communications services. While most Tenants start this process too late, it is also possible to start too soon, especially for a smaller Tenant in a hot market. An experienced Tenant / Buyer Rep can help you to figure out the right time for your organization to get the ball rolling, including for new construction related to a build-to-suit or design-bid-build project.

Here are some important details to know about many lenders’ SBA 504 Loan Programs…

  • Down Payment:10% down payment, but any tenant improvement (“TI”) costs incurred by the Buyer, up to 10% of the Purchase Price, can also count towards the down payment.
  • Interest Rate:Low, fixed interest rate (blended rates from the Lender and SBA), right now in the range of 5.0% to 6.0%.
  • Loan Term:Five (5), seven (7) and ten (10) year loan terms are available, maybe fifteen (15) years in some instances. At today’s low interest rates, it makes sense to go as long as possible.
  • Amortization Period:Most SBA Lenders allow a 25-year amortization period for the Buyer’s monthly payments of principal and interest. (These monthly payments, in effect, are your NNN rent.)
  • Origination Fees:Some SBA Lenders do not charge Origination Fees; for example, a 0.5% “Participation Fee” will be paid by Chase when an SBA 504 Loan actually closes.
  • Personal Guarantee:No Personal Guarantees are required, assuming the Buyer has good credit; this is a huge benefit to qualifying Buyers.
  • Occupancy Requirement:Buyer must occupy at least 51% of the floor area of the subject building or condo space, as per SBA 504 Loan Program requirements.


In addition, Chase, Wells Fargo and some other SBA Lenders would allow the following “soft costs” and upfront expenses to become part of a Buyer’s 10% down payment for an SBA 504 Loan, which further sweetens the case for buying…

  • Physical Building Inspection:Find deficiencies upfront in the target property, for example, roof, HVAC equipment and drainage issues that may require expensive maintenance, repairs and/or replacement. The Seller might address some or all deficiencies or may even consider reducing the Selling Price. However, if the issues uncovered are severe or too expensive to fix, the Buyer can elect to terminate its Purchase Contract, get back its Earnest Money and avoid buying a “lemon.”
  • Phase I Environmental Site Assessment (“ESA”):Also called a “Phase I,” to ensure that subject property or condo space does not have hidden Environmental Issues, which can sometimes cost more to clean up than the Purchase Price of a properly.
  • Legal Fees:Buyers should hire a real estate attorney, not a general business counsel.
  • Space Planning & MEP Engineering Fees:It might be necessary to have a professional Space Planner produce formal drawings to determine if your long-term operations can fit successfully into a space and perhaps elevate your Space Plan to a formal Preliminary Pricing Plan in order to obtain competitive TI cost estimates from several General Contractors.
  • Structural Engineering Fees:If there are any concerns about structural elements, for example, floor loading or weight-bearing issues, then it might be necessary to have a Structural Engineer inspect the building or space.
  • Zoning Verification Letter:Make certain the legally allowed use(s) of a property will allow the Buyer’s intended use.
  • Building Permit & Fees:If certain kinds of TIs are required to modify the space for the Owner-Occupant’s use, particularly Mechanical, Electrical and/or Plumbing (“MEP”) components, then official Demo and/or Building Permits may be required.


  • ADA Inspection:Consider whether or not the building or space is compliant with the Americans with Disabilities Act (“ADA”), especially the restrooms and entrances/exits from the building.


If your privately held company or professional firm has good credit and is experiencing sticker shock over today’s rental rates for Office or Industrial space, then buying a building or condo space with an SBA 504 Loan might just be the perfect way to beat Landlords’ high rental rates to lease space.

Other major benefits of buying space include depreciation and, if the Buyer is fortunate, appreciation in the value of its property. Even if you might sell your company or professional firm, there may be a future opportunity to lease your building or condo space to someone else and turn the investment into a valuable vehicle for your retirement and an asset for your estate. You can’t really do these things by continuing to lease space from a Commercial Landlord.

Today’s low interest rates, combined with a 10% down payment for an SBA 504 Loan, can make buying a great way to beat high commercial lease rates and your decision a true “no-brainer.”

Written by

William Gary, MBA, MIM



Phoenix Commercial Real Estate and Investment Real Estate: investors and Owner / Users need to really know the market today before making a move in Commercial Properties or Investment Properties in Phoenix / Tucson / Arizona, as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land in Phoenix / Tucson / Arizona.  Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial Properties and Investment Properties.

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