Buying the Building Your Business Operates In

Buying the building the business operates in shifts a monthly rent check from an expense into equity building. It also changes the risk profile, the tax picture, and the flexibility of the business meaningfully. For Macomb County small business owners tired of rent going out the door, the question is not whether ownership beats rent in principle but whether the specific building at the specific price actually works for the specific business situation.

The economics of owner user acquisition. A business paying $7,000 monthly rent, or $84,000 annually, is paying somewhere in the range of $7 to $11 per square foot NNN or $14 to $19 per foot gross on a typical Macomb County building. That rent supports roughly $1 to $1.3 million of building value at typical cap rates. Buying the same building at that value with SBA 504 financing at 90 percent LTV requires $100,000 to $130,000 in down payment, replacing rent with debt service that runs similar to slightly more than the rent was.

The equity building over time. Every mortgage payment reduces the loan balance and builds equity. Over a 20 year SBA 504 amortization, the entire loan gets paid off. The business owner ends 20 years with a debt free building worth what it appreciated to over that time. Rent payments produce nothing at year 20 other than the receipt for the final month’s rent.

The tax picture. Business owners can depreciate the building over 39 years, generating tax deductions that offset business income. Cost segregation studies accelerate significant depreciation into early years. Interest on the mortgage is deductible business expense. Property tax is deductible business expense. The combined tax benefits often add 20 to 40 percent to the effective return on ownership beyond appreciation and equity building.

The Michigan context. Michigan property tax uncapping at sale means the buyer’s post sale property tax will typically exceed the seller’s, which affects the total occupancy cost comparison against rent. SBA 504 works well for owner occupied Macomb County acquisitions with Michigan CDCs providing the SBA piece. Michigan is an attorney close state, which adds attorney fees to the acquisition process but also provides attorney oversight of documentation.

SBA 504 versus SBA 7(a) for owner user. Both work. 504 provides fixed rate long term financing on 40 percent of the deal through the CDC piece, which produces rate certainty for a substantial portion of the loan. 7(a) provides variable rate financing on the whole loan but allows the borrower to combine real estate with working capital or business acquisition in one facility. Pure real estate deals with an established business often work best under 504.

The building fit question. A building that fits the business today might not fit in 5 or 10 years if the business grows or contracts. Owner user acquisitions should account for realistic growth trajectory. A building with room to expand internally or add adjacent space provides growth flexibility. A building at capacity for the business creates a mismatch problem if growth materializes.

The lease income possibility. Buildings with more space than the owner user business needs can lease surplus space to compatible tenants. That income offsets debt service and eventually pays a meaningful portion of the carrying cost. SBA 504 requires 51 percent owner occupancy on existing buildings, allowing up to 49 percent to be leased to third parties. This structure produces owner user benefits plus investor income streams.

The exit optionality. Owner user buildings can be operated by the business, leased to a successor business, or sold to an investor if the business relocates or closes. The multiple exit paths provide flexibility that rent does not. A business under a lease that closes or moves has no residual value from the property.

When ownership does not fit. Businesses with uncertain long term location plans. Businesses in industries experiencing rapid change where flexibility matters more than equity building. Businesses without cash for down payment. Businesses whose credit and financial profile does not support SBA financing. Any of these situations makes continued renting appropriate.

The all in comparison. Total ownership cost includes mortgage payment, property taxes, insurance, maintenance, utilities, and reserves. Total rent cost under NNN includes rent, pass throughs, and utilities. The two numbers often come out closer than owners expect, and the difference goes toward equity building in ownership rather than to a landlord in rent.

TDG Commercial, known as top commercial realtors in Macomb County, guides business owners through owner user acquisitions across the region.