Unlocking Value: Acquiring Leased Commercial Real Estate with an SBA Loan

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For business owners currently leasing their commercial properties, the prospect of acquiring the real estate they occupy can be incredibly appealing. It offers a range of benefits, from building net worth and saving on rental expenses to gaining control over the location and enjoying tax advantages. On the other side of the equation, SBA lenders appreciate rent-elimination real estate loans due to the reliable cash flow they provide and the collateral value of the property. This article explores why business owners choose to acquire leased real estate and why SBA lenders love these SBA loans, which are called “rent replacement” loans in banker’s parlance.


Why Business Owners Like Acquiring the Real Estate They’re Leasing

Build Net Worth as Real Estate Appreciates

Real estate tends to appreciate over time, allowing business owners to build equity and increase their net worth. By transitioning from being a tenant to becoming an owner, they can benefit from the potential long-term value appreciation and enjoy the financial rewards of property ownership.


Save Money by Eliminating Rent

Paying rent can be a significant expense for businesses. By acquiring the real estate they’re leasing, business owners eliminate this recurring cost, allowing them to redirect those funds towards business growth, expansion, or other investments. This leads to substantial cost savings and improved financial stability.


Control Location without Lease Worries

Acquiring the leased commercial property provides business owners with greater control over their location. They no longer need to worry about the landlord pulling the lease, forcing them to relocate and potentially disrupt their operations. Acquiring the property ensures stability and long-term control over the business’s physical presence.


Tax Depreciation Benefits

When a business owns the commercial property, they can take advantage of tax depreciation benefits over 39 years. This means they can deduct a portion of the property’s value each year, reducing their taxable income and providing additional tax savings and increased cash flow. For example, a $1M building would depreciate at roughly $25,000 per month, which shelters $25,000 of income annually. Assuming a 40% tax rate, a $25,000 depreciation deduction adds $10,000 in cash savings for the borrower each year for 39 years.


Flexibility with Leasehold Improvements

As owners of the property, business owners have the flexibility to make leasehold improvements and modifications that suit their specific business needs. They can customize the space to optimize productivity, enhance the customer experience, and align it perfectly with their brand identity. This level of flexibility and customization is often restricted when leasing from a landlord.


Why SBA Lenders Love Rent-Elimination Real Estate Loans


Cash Flow to Support Debt Service

When a buyer is already leasing the property, their ability to afford rent demonstrates a reliable cash flow. This reassures lenders that the borrower has the financial capacity to support mortgage payments. The existing cash flow from the business, combined with the elimination of rent expenses, significantly strengthens the borrower’s position and reduces the risk for the lender.


Collateral Value of Real Estate

Acquiring the leased commercial property converts the property itself into collateral for the SBA loan. Real estate is a tangible and valuable asset, providing a secure form of collateral for lenders. In case of default, the lender can sell the property to recover their investment, minimizing the risk associated with the loan.


Established Business Owner with Industry Experience

Business owners who are already successfully running their businesses demonstrate a track record of experience and industry knowledge. This eliminates the concerns that lenders typically have when it comes to SBA business acquisition loans. The proven ability to manage and operate a business enhances the borrower’s credibility and increases the lender’s confidence in their ability to manage the real estate effectively.


Final thoughts

Acquiring leased commercial real estate with an SBA loan offers business owners numerous advantages. From building net worth and saving on rental expenses to gaining control over location and enjoying tax depreciation benefits, the appeal is clear. Simultaneously, SBA lenders are drawn to rent-elimination real estate loans due to the reliable cash flow provided by the borrower, the collateral value of the property, and the business owner’s established track record. Acquiring the real estate you’re currently leasing opens up opportunities for long-term financial stability, growth, and the potential to enhance the value of your business.


FAQs related to tenants acquiring commercial real estate

How much down payment is required for an SBA real estate loan?

Some SBA lenders will finance 100% of a real estate purchase for an existing tenant of a commercial real estate property. Other lenders may ask the buyer to inject cash of 10% – 15% of the purchase price.


Can I use an SBA real estate loan to refinance an existing commercial property?

Yes, the SBA offers loan programs that allow business owners to refinance their existing commercial property with an SBA loan. This can be a viable option to replace an existing lease and gain the benefits of real estate ownership.


How long does it take to get approved for an SBA real estate loan?

The timeline for approval of an SBA real estate loan can vary depending on factors such as the complexity of the loan application, the lender’s processing time, and the responsiveness of the borrower in providing required documentation. Typically, the entire process will take two to four months. See our SBA Loan Real Estate Guide post for more information on SBA real estate loans.


When calculating cash flow to determine affordability, do I add back rent I paid my landlord?

Yes, since rent expense would be going away if you acquired a property, you would add back rent expense to historical and projected cash flow to determine EBITDA. This is sometimes referred to as EBITDAR (Earnings before Interest, Taxes, Depreciation, Amortization, and Rent Expense). We discuss how to calculate EBITDA here.


How much will my monthly real estate loan payments be?

To estimate your monthly loan payments, you can utilize our SBA loan calculator. It’s important to note that your SBA lender will typically require the business to generate cash flow of at least 115% of the loan payments. For instance, let’s consider a $1 million SBA real estate loan with a 10% interest rate. In this scenario, the monthly loan payments, also known as debt service, would amount to $9,087. However, your bank will want to see a cash flow (EBITDAR) of $10,450 to ensure a margin of error in case there is a slight decrease in cash flow. This ensures that the borrower can still comfortably afford the monthly loan payments.


Is it a wise decision to buy real estate when interest rates are high?

When considering the purchase of real estate in a high-interest rate environment, it’s important to note that most SBA loans come with variable interest rates. Surprisingly, if the borrower can comfortably afford the loan payments despite the high interest rate, it may actually be a more favorable scenario than purchasing in a low-rate environment. This is because when interest rates rise significantly, as they did during 2022-2023, those who bought in a low-rate environment may find themselves unable to afford the loan payments.


I’m ready to go! What are the next steps?

Complete our lender match tool, which we call Lender Connect, and we will introduce you to SBA lenders who would love financing commercial real estate purchases.

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