According to the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, commercial real estate has delivered annualized returns of around 9% over the past 30 years.
If you are a small business owner and you lease the space where your company operates, you could be missing out a tremendous opportunity for building wealth through commercial real estate.
Below we walk you through an example to demonstrate the potential.
Example of Building Wealth through SBA 504
Linda has been operating a daycare center in Georgia for the past ten years. She currently leases the building from her landlord, but the landlord has recently offered her the opportunity to buy the building from him for $2 million.
Under an SBA 504 Linda would be required to put down 10% of the purchase price – $200,000
Linda plans to retire in ten years and wants to know if she sells the building when she retires will it end up being a smart investment.
Her mortgage will be $1.8 million after the closing of the purchase.
If Linda goes to sell in 10 years she will owe approximately $1.4 million (estimate based on current interest rates).
While it’s impossible to predict future performance of assets, let’s assume that the property appreciates at the same rate as commercial real estate has on average appreciated for the past 30 year – 9% per year.
Property Value – $2,000,000 x (1 + .09)^10 = $4,734,727
Linda’s Equity – $4,734,727 – $1,400,000 = $3,334,727
In this scenario Linda’s $200,000 down payment would be worth over $3million (more than a 15x return!) in 10 years.
or
Linda could keep renting from her landlord for the next 10 years and keep her $200,000 down payment.
What if?
There is no guarantee that real estate prices will appreciate by 9% a year over the next 10 years. We used that number in the example above because that has been the historical norm for commercial real estate. There are obviously other factors that determine real estate values at an individual asset level – (i.e. location and property type), so what does this calculation look like for more subdued long term real estate returns?
The table below shows approximates the amount of equity a borrower could have in a property at the end of 10 years under different Real Estate price appreciation scenarios:
| Annual Appreciation | Value after 10 years | Equity at Year 10 |
| 7% | $3,934,302.71 | $2,534,302.71 |
| 5% | $3,257,789.25 | $1,857,789.25 |
| 3% | $2,687,832.76 | $1,287,832.76 |
Common SBA 504 property types:
Industrial / Manufacturing
- Manufacturing plants
- Fabrication facilities
- Warehouses (with owner operations inside)
- Distribution centers
Professional / Office
- General office buildings
- Medical offices (physicians, dental, etc.)
- Professional service offices (law, accounting, engineering)
- Corporate headquarters
Retail / Consumer Services
- Retail storefronts
- Restaurants (sit-down or quick service)
- Auto dealerships
- Gas stations with convenience stores (owner-operated)
Hospitality / Lodging
- Hotels & motels (limited-service, mid-scale)
- Conference centers tied to lodging
Special Use Properties (Owner-Operated)
- Self-storage facilities
- Car washes
- Childcare centers / daycare facilities
- Fitness centers / gyms
- Assisted-living facilities
