San Diego owner-user office and industrial acquisition activity, which has been lackluster in recent years despite historically low asking prices, could receive a much-needed boost in 2012 as financing restrictions start to loosen, with SBA loan opportunities and other new financing products opening the door for small business owners.
“The number of small business owner-user real estate transactions could increase by as much as 20 percent in 2012, as companies start to regain confidence and finally have some lending resources to act on opportunistic pricing,” said Marc Posthumus, CCIM and associate with Cushman & Wakefield. “From a pricing perspective, there has been a tremendous window of opportunity for companies to invest in their business locations for well over a year. However, lingering economic uncertainty and tough lending restrictions have curtailed much of this activity.”
According to Posthumus, owner-user purchase activity peaked in 2006, with 323 industrial transactions and 159 office transactions. This compares to 2011, which recorded just half of that volume with 146 and 88 industrial and office purchases, respectively.
“Signs that the economy is starting to stabilize along with slowly improving employment figures are prompting landlords to tighten their rent incentives, and are also pointing to higher sales prices in the years ahead,” he said. “This in turn is sparking renewed interest in owner-user purchases by those small businesses that have capital and are starting to see an upturn in their cash flow.”
In 2011, Posthumus reports that office properties saw their average price per-square-foot increase by $22 to $220, while industrial stayed relatively flat at $101 per-square-foot. In 2012, however, prices for both product types are anticipated to rise conservatively by 5 percent.
“Anticipation of rising prices, record-low interest rates, and more available financing through SBA 504 programs and other small business-directed products offered by a few select banks, will translate into more owner-user transactions in 2012,” he said.
Silvergate Bank, a San Diego-based bank focused on meeting the financing needs of small San Diego businesses, is one of just a few in Southern California that has qualified for a Small Business Lending Fund through the U.S. Treasury. The bank expects to loan approximately $15 million this year through this fund to assist small businesses with their financing needs, including owner-user real estate purchases and refinancing.
“This fund enhances our ability to meet the real estate needs of small businesses.” said Derek Eisele, executive vice president and chief lending officer with Silvergate Bank. “This product is ideal for qualifying borrowers pursuing purchases in the $500,000 to $10 million range.”
Eisele said in addition to the U.S. Treasury’s Small Business Lending Fund program, businesses can utilize Silvergate Bank’s standard commercial loan program (up to 75 percent loan-to-value) or use SBA 504, which provides 90 percent financing, but has additional eligibility requirements.
“Silvergate Bank’s experienced lending team helps our small business customers understand their options as it relates to their particular needs, and walks them through the process to make it as easy as possible,” he said.
Posthumus noted that small business-driven banks such as Silvergate understand the position many small businesses are in coming out of the recession. Additionally, he said these banks are also more interested in financing owner-occupied properties, because there is less risk than typical for-lease investments.
“Owners today are looking at the very powerful combination of low building values and low interest rates, which gives them tremendous purchasing power,” Eisele said. “Essentially, the ability to acquire 41 percent more building compared to the 20-year average SBA rate of 8.74 percent.”
Posthumus added that: “Businesses who act now to invest in their company’s location not only will benefit from tremendous value-add potential as prices have nowhere to go but up, but also from the outstanding tax benefits that come with ownership versus leasing.”
Eisele and Posthumus cite an example of a 16,650-square-foot building that sells for $2,050,000. Gross monthly debt service of $13,526 and triple net expenses of $8,326 are offset by tax savings of $8,594 and appreciation of $1,708, for effective monthly debt service of $11,549, or 69 cents per-square-foot.
Leasing the same property at 99 cents per-square-foot, including triple net expenses, results in gross monthly rent of $24,811. After tax savings of $9,925, the effective monthly lease rate is $14,887, or 89 cents per- square-foot.
“Annually, the business owner in this case saves $40,000, and over a typical seven-year lease term, saves $280,000,” Posthumus said.
According to Eisele, “While some small businesses may not be ready psychologically or financially to commit to a purchase, there is clear opportunity for those who are positioned to buy and understand the tremendous cost savings they can realize.”
Posthumus, an owner-user specialist with more than 13 years of experience and $250 million in sales volume, said the increased activity he anticipates in 2012 will further the reach of his charitable “Give Back” program, through which he donates 10 percent of every commission he receives to a charity of his client’s choice. He launched the program in 2011 to help support nonprofit organizations that have seen donation activity plummet with the recession.
“Small businesses in particular haven’t had the ability to support these organizations like they used to,” he said. “By donating a portion of my commission to their preferred charity, I am giving them a vehicle to give back to the community in a way that works with the business.”