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Bill Holden stands inside his Tru Fitness building, with client Karen Pope making her way to the next machine. More and more small-business people like Holden are buying buildings instead of leasing.
Sacramento Bee photo
Bill Holden stands inside his Tru Fitness building, with client Karen Pope making her way to the next machine. More and more small-business people like Holden are buying buildings instead of leasing.

Owning where you work
More firms buying, not renting

By Jon Ortiz
Sacramento Bee

SACRAMENTO, Calif. — Bill Holden is a 70-year-old commercial real estate trendsetter, one of a new generation of small-business owners who are becoming their own landlords.

While slowing home sales have grabbed real estate headlines the last two years, small commercial building purchases have quietly picked up speed around the country.

Many of the properties aren’t much bigger than a large house, but they have become fashionable investments with business owners who face what seem like logic-defying office rent increases in markets where vacancies are inching up.

They’re also enticed by favorable federally backed loans, relatively low interest rates and the personal and business benefits that go with owning where they work.

“I’d rather own than lease,” said Holden, who owns Tru Fitness, a high-end health club and spa in Roseville, Calif. “When you look at the numbers, it just makes sense.”

Owners of small buildings cite escalating lease rates as one of the biggest reasons they buy.

One reason for the contradictory trends is that deep-pocketed landlords are holding out for premium tenants, says a recent study by New York real estate research firm Reis Inc..

Rents at office properties nationwide jumped an average of 3.1 percent during the second quarter of 2007, the largest quarterly rise in seven years.

The increases are being driven by the sales of office buildings at record-setting prices to private-equity firms, investment banks and other nontraditional landlords that can afford to keep space vacant rather than lease it for less than they had expected.

Many prospective buyers turn to the U.S. Small Business Administration for a loan, said Christopher Hurn, president and chief executive of Mercantile Commercial Capital LLC.

Hurn’s company in Orlando, Fla., specializes in the SBA’s so-called 504 loans for small to midsized business owners to purchase or construct commercial real estate. “We’re seeing more people than ever from all across the country apply for these loans,” Hurn said. “They’re realizing that they don’t have to be subject to 2 to 3 percent rent escalations every year.”

Property ownership also lets a small-business owners build equity by betting on commercial real estate. When they spend money on a building’s amenities to suit their needs, it’s their property that gains value.

“It’s like owning a home vs. renting,” said Scott Yuill, a State Farm Insurance agent who moved into his own building about a month ago after leasing office space for 19 years. “You’re paying yourself, not a landlord.”

Size

Most owner-occupied buildings are 5,000 square feet or smaller, but many business owners buy extra space to accommodate future growth. They usually lease the spare area, offsetting the loan payment.

There are plenty of other potential benefits: the growth of the property’s value over time, the chance to buy a place close to home and tax rules that allow owners to take deductions renters can’t.

If business tails off and the economy slows at the same time, small owner-occupants could find themselves losing money on their buildings just like their big-time counterparts.

Those that lease extra space could lose a tenant and lease money in tough times. And unpredictable interest rates can make today’s good deal tomorrow’s bad one with a 10-year or 20-year mortgage locking it in.

“We always tell people that an owner-user shouldn’t buy to make a quick buck,” said Robb Osborne of Tri Commercial. “They need to buy for a 10-year investment, minimum.”

And don’t get in without an exit strategy, said Tru Fitness owner Holden.

“Worst case, if I have to get out,” he said, “I can always rent out the building.

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