Own your building: consider financing through the SBA.

• Author: Young, Edward
• Position: Small Business Administration

Controlling costs is a big part of managing a successful business. One way to control expense is to control your company's facility. In addition to controlling cost, owning your own building may allow you to take advantage of several tax and retirement strategies while building wealth via appreciation.

Traditional lending programs have made it difficult for small and medium-size companies to purchase their buildings. Often it is difficult for business owners to sink 25-30 percent of the purchase price into the building when these funds could be better used for working capital to support the ongoing operations of the company. Short repayment terms or balloon notes place additional pressure on cash flow.

Perhaps one of the best ways for a small to medium size company to purchase its building is through the U.S. Small Business Administration's 504 Loan Program. This program was designed to provide growing businesses with long-term, fixed rate financing for up to 90 percent of the purchase price (or appraised value, whichever is less) of their building.

504 Loans are provided via a private-sector lender, such as a bank or commercial mortgage company, and a certified development company, or CDC. Typically, the private-sector lender would provide a conventional first mortgage for up to 50 percent of the project amount; the CDC would provide a second mortgage for up to 40 percent of the project amount; and the borrower would contribute the remaining 10 percent as equity.

The rate and terms of the first mortgage are determined by the first mortgage lender. Thus, the first mortgage structure could vary depending on which lender you select. The rate and terms for the second mortgage are dictated by the SBA. Currently the rate on the second mortgage is 5.76 percent, fixed for the entire 20-year term of the loan.

Money for the second mortgage comes from the sale of debentures to investors on Wall Street. These debentures are backed by the SBA. The maximum SBA debenture is typically $1 million. However, when "public policy goals" are met, the debenture amount may be increased to $1.3 million.

Examples of "public policy goals" include business district revitalization, expansion of exports...