With gov’t support, small businesses buy offices

Radhika Sivadi

4 min read ·


Las Vegas dentist Chris Cozine wanted to cut costs after the Great Recession. He found an unlikely way: He ditched the office he was renting and bought 6,600 square feet of his own.

Besides improving his surroundings — he left the gray walls of the old place in favor of an open layout with modern glass tiles and a mix of colors — Cozine is paying $1,800 a month less on the mortgage than he was paying in rent.

"I save money, but the icing on the cake is that the office decor is of my choice," Cozine says.

At an otherwise bleak time for real estate, there's a mini-boom in one corner of commercial property. Dentists like Cozine, restaurant owners, doctors and other business owners are snapping up space in vacant strip malls and office buildings.

They're doing it with help from a government loan program for small businesses that has been around since 1959 but has shot up in popularity since the end of the recession, with private lenders wary about extending real estate loans.

The amount of small businesses loans under this program rose at an annual rate of 16 percent in the three years after the end of the recession in 2009 to $4.45 billion, according to the Small Business Administration. After the 2008 financial crisis, banks were so reluctant to lend that 27 percent of such loans disappeared in 2009.

It's a good time to be a buyer now. Commercial real estate prices are at rock bottom, fallen 30 percent from the peak nationally. And interest rates — for those who can get loans, anyway — are at historic lows.

However, small businesses balk at the 25 percent required up front for a typical loan, especially at a time when they have worked hard to save cash after surviving a brutal recession.

"Cash is a security blanket for small businesses, and they would be scared to put a big check down now," says George Smith, head of business banking at Bank of America.

But these government-backed loans make it enticing. Business owners are required to put up a down payment of just 10 percent, compared with the 25 percent to 40 percent demanded in a commercial property loan.

The attraction for banks is that it is a less risky loan, because they commit only 50 percent of the loan, while the government shoulders 40 percent that's left over.

"Our job is to keep credit flowing when times are tough," says Jeanne Hulit, associate administrator capital access at the Small Business Administration.

The SBA didn't provide default rates for the loans. But Scott Geller, CEO of business banking at JPMorgan Chase, says these loans typically have had superior performance in a portfolio of commercial real estate loans. That's because one of the requirements of the loan is that the property is primarily occupied by the borrower.

Owners that occupy the building space are more likely to pay back their loans, unlike an investment property where if renters leave, borrowers are more likely to default unless they find another business to lease it.

At some banks, the numbers of these loans have soared. In the first three months of this year, such government-backed loans grew by 16 percent, after growing 23 percent for all of 2011, at JPMorgan Chase. At Bank of America, which didn't provide the latest numbers, such loans grew by 20 percent last year.

Who qualifies for the loans, termed SBA 504, depends on the industry. For the most part, government rules require that the business have less than $5 million in income and fewer than 500 employees.

The loans are typically for 20 years — compared with the standard 30 years for most fixed-rate home loans — and come with interest rates that are slightly below market rates.

It was a winner for Gary and Zell Dwelley, the husband-and-wife owners of Beach Break Cafe in Oceanside, Calif., just north of San Diego. They had leased their restaurant space for 22 years and wanted something bigger to fit the 500-odd customers who file in on Sundays for their popular coffeecakes and banana crunch French toast.

"What we really felt bad about was that we only had one bathroom, which wasn't even handicapped-accessible," Zell Dwelley says.

Down the street from their restaurant, a developer had refurbished an abandoned gas station with plans to rent space to Starbucks. However, the developer couldn't get Starbucks in after the 2008 financial crisis and the recession. The Dwelleys noticed that the price on the property dropped from $1.2 million before the recession to less than $700,000 in 2010. They decided to bid.

The restaurant owners clinched the deal at $690,000 and scraped together everything they had for the 10 percent down payment. JPMorgan Chase financed the deal. Now the restaurant has two bathrooms, both accessible to the disabled.

Commercial property prices have become very attractive, says Walter Page, a director of research at PPR, a division of CoStar Group, a commercial real estate data company.

"There is an abnormal amount of opportunity now – if people want to buy, or fix and renovate, now is the time," Page says.

These loans made up just 10 percent of the overall $50 billion commercial real estate that was sold in 2011. But it's playing a part in helping stabilize prices, which rose 14 percent in 2011.

The Las Vegas dentist, Cozine, kept 3,400 of the 6,600 square feet for his own office and rented the rest to a pharmacy, which is providing him extra savings. He believes that property prices will start rising again at some point.

"I look at my office as a retirement nest egg," Cozine says.


Small Talk columnist Joyce Rosenberg will return next week.

Pallavi Gogoi, AP's banking reporter, can be reached at https://twitter.com/pgogoi

Radhika Sivadi