This is the second installment of my Top Ten list that was published in the Orlando Business Journal. Read on to get the top 5 things to do when considering wealth-creation through commercial real estate ownership . . .
5. Consider adding other furniture, fixtures and equipment (FF&E) into your commercial loan — as long the FF&E costs are still a minority of your overall project costs and the FF&E have relatively long useful lives, you will get to amortize these on the much longer real estate terms (which will greatly improve your cash flow) at the same time that you depreciate these over shorter, allowable IRS schedules. This aspect gives you truly the highest cash-on-cash return for your project when you employ 90% loan-to-cost SBA 504 financing.
4. Consider buying/building more square footage than you need right now — you can always grow into it, but this will also allow you to get some rental income until that time. In virtually all situations with 504 loans, you will have to occupy at least a simple majority within one year of buying the property.
3. Always establish a real estate holding company or what is known as an Eligible Passive Concern (EPC) to own your new property — the formation of a master lease between an EPC and your operating company is how you’ll tie the two together. If you later decide to sell your operating business, you can keep the real estate company (and by default, the real estate) from which you can continue cashing rent checks. It is in this way that owning your commercial property can become a great retirement asset for small business owners everywhere, all while “paying yourself” to do it.
2. Consider partnering with another business owner in your EPC if coming up with the down payment is tough – if we’ve already pre-approved you for X dollars, this solution will allow you to gain the advantages of commercial property ownership even while you share the equity requirement and upside with another. Please understand that your new partner’s operating business will also have to be examined to commit to your loan, and don’t forget to always use good judgment when partnering with someone else. Make sure to clearly stipulate the buy-out provisions in your operating agreement or other documents ahead of time — disagreements do occasionally occur, but corporate entity documents are usually better at resolving disputes than personal memories.
1. Only work with a commercial loan specialist – again, your time is precious so only deal with a lender that specializes in commercial loans. Involving residential mortgage brokers or bankers in your transaction will only slow the process down and will probably cost you in expertise, loan terms, fees, and pricing.
To Our (Yours and Ours) Best Year EVER,