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For small business owners, commercial real estate
investment is the hottest new retirement asset. If your mind has already
jumped to “REITs” — or shares in Real Estate Investment Trusts — think
again. I’m referring to the ownership of the commercial facilities small
business owners currently lease, or new commercial facilities they can buy
or develop.
Small business owners can thank the U.S. Small
Business Administration for this rather substantial opportunity.
The SBA sponsors a specialty lending program designed
to assist successful small business owners who want to acquire or develop
their own facilities. The SBA did not design the program as a vehicle for
creating superior retirement assets, but it doesn’t take a financial genius
to connect the dots — and the business owners who have done so already are
profiting enormously from their decision.
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Pre-Qualify
for Commercial Financing
It’s called the SBA 504 program and it’s been around,
though not well promoted, for nearly twenty years. If a banker failed to
mention it as an alternative, don’t be too dismayed. Traditional lending
institutions prefer conventional financial instruments because they offer
traditional lending institutions greater profit margins. The SBA 504 program
is clearly intended to benefit small business owners, not necessarily the
financial community.
Here’s what SBA 504 loans offer qualified small
business owners: below market fixed interest rates, longer terms and with a
cash investment as low as 10 percent of the total project cost. Typically,
small business owners can reduce real estate expenses by up to 40 percent
while building an asset that benefits them long after they’ve sold or
shuttered their business. As an investment, this type of financing offers
the highest cash-on-cash return available for commercial real estate, which
means not only does their capital work harder for them, but they keep more
of it to grow their business too. You can’t find a traditional lending
product that can beat this.
Next to home ownership, being your own boss is the
number one American Dream. That's why most small business owners started (or
acquired) their own business. And their success is almost entirely dependent
on their drive, ambition, innovation and attention to detail. Eventually,
however, they'll sell their business or pass it along to their children or
shut it down (very few small businesses go public). With SBA 504 financing,
they can turn that drive and ambition into another long-term asset that
offers immediate and significant tax advantages, as well as makes great
sense for long-term financial planning.
We take an innovative approach to commercial real
estate ownership. For most clients, we establish a separate real estate
holding company to own the real estate asset — we separate their operating
company – the one they may eventually sell or pass on to their children
— from this new and important real estate asset.
The result is that, in 10 years or 25, when a small
business owner sells their business or gift it to their children or shutters
it, the real estate asset will retain important appreciated value in a
separate holding company.
They will also have been paying themselves rent
instead of some faceless landlord, effectively growing their real estate
asset, building their equity and benefiting from the tax advantages all at
the same time.
And once they sell their business, they’ll still have
an income-generating asset that is one of the soundest long-term investments
anyone can make.
Small business owners can continue to be landlords in
their retirement, or they can sell the asset — typically at a rather
significantly appreciated value.
Even if they gift the business to their children, the
new owners will have to continue paying rent. Who would make a better
landlord their children than themselves?
The value of the SBA 504 lending program is clear.
Over the past 19 months our firm has been operational, we have closed a
total of 33 loans that average almost $1 million each.
Almost every one of our clients has adopted our
financial planning strategy. For successful small business owners, this is
almost a no-brainer. If a small business owner hasn’t already done so, it’s
time to stop paying rent to someone else and consider owning for all the
right reasons.
