I have an existing 7a that's almost 3 years into the term for a manufacturing company. I'm considering either buying our current building or a new building as a part of an expansion. Is it worth exploring this now given we're at peak rates or waiting 6-12 months to see how they adjust? I'm not under any operational pressure to make a move and have plenty of debt service coverage currently (~3x dscr)
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First, there are SBA 7A lenders that offer what is called rent replacement, where you could finance up to 100% of the property purchase price for your business so long as you have the cash flow to do so. The issue with that product is the interest rate is typically on the higher end of the scale.
The second option you have is to do an SBA 504 loan. With an SBA 504 loan you can finance up to 90% of the property purchase price. What happens is a bank funds 90% initially and then roughly 60 days after closing the SBA comes in through a Certified Development Corporation known as a CDC and takes out 40% of the purchase price. The SBA 504 loan is a 20 or 25-year fixed rate loan (your choice which) and the interest rates in May were 6.55% for 25-years fixed. The Bank then provides you a 10 year loan term on the 50% of the loan they retain typically with the interest rate fixed for 5 to 10 years, and that loan is amortized out over 20 to 25 years. Fixed Bank rates right now are from the high 6% range into the mid to upper 7% range. The benefit of the SBA 504 loan is a long-term fixed rate on 40% of the debt. You can always refinance the Bank's first mortgage in the future and the SBA will subordinate their second loan to the new first mortgage lender.
The third option you have is to put more cash down and do a conventional commercial mortgage loan. Typically for owner-occupied properties you can finance up to 80% of the property purchase price. You would likely get a 5-year fixed rate balloon mortgage with payments amortized out over a 20 to 25-year amortization. Right now a Bank fixed rate is in the same high 6% to mid 7% range, although SBA 504 Bank rates tend to be slightly better because the loan to value on the Bank end is only 50% instead of up to 80% with conventional financing.
As it relates to your question on interest rates, it really depends on your perspective. If you are trying to limit your cash down, you would likely end up with a variable rate on the SBA 7A loan product. That would be a higher interest rate. If you want to use the SBA 504 product, the 25-year fixed rate available now is still a very good interest rate based on historical standards for a long-term fixed rate. You then end up with a shorter-term fixed rate on the Bank portion so you can always adjust that in the future if interest rates move by refinancing the Bank portion of the loan. I think you need to determine is if at today's interest rates buying the property provides you additional value as you will be saving on rent, building equity via debt amortization and possibly building equity as property values continue to climb.
If you are waiting for a lower long-term interest rate one thing you need to keep in mind is that we are in an inverted yield curve right now where short-term rates are higher than long-term interest rates. That should not be the case. Eventually the yield curve needs to correct itself. So it is possible the Fed lowers interest rates in the future and long-term rates do not move down in lockstep and the yield curve corrects itself, in which case we could have Bank fixed rates in the 6 to 7% range for a while. Based on historical averages it is not a bad interest rate range to be in. However, if you look at that rate range in comparison to the last 10+ years, it appears high.
I hope this information helps. If you would like to discuss options in more detail you can reach me here or directly at --@----.com Good luck with your decision.