When small businesses consider commercial financing to buy their own building, there are a lot of things to think about. Obviously, things like location, accessibility, building condition and space are important, but there are an increasing number of small business owners deciding to go the extra square foot. These owners are buying or constructing buildings that contain additional space to lease out to other tenants. As a result, they are not just building owners, but also investors as well.
This is a growing trend that we have experienced largely with those clients seeking office building financing or retail property loans. These borrowers have the foresight to finance and buy more space than they need in order to lease it out. Sometimes this can be as small as an additional 500 square foot up to over 1,000 square feet. In certain situations, building owners can make almost enough from their additional space to cover a substantial amount of their commercial mortgage.
In the retail sector, this trend has proven quite valuable. It is not uncommon to find a convenience store owner build additional space that can be used for smaller tenants such as store space for a cleaners or for a liquor store. Some have even gone so far to obtain strip shopping center construction loans in order to construct something a bit larger. These owners also have control in who co-tenants the building with them so they can build a synergy with their fellow tenants.
The same is true in the office sector when attorneys or accountants build or buy a larger building in order to lease out the additional space. This not only creates additional revenue but the opportunity to create synergy by leasing that spaces to businesses that compliment or enhances their own, such as a real estate company leasing out space to a title company.
When it comes to seeking office building financing or shopping center financing, creating an income stream with additional space can help in obtaining a commercial mortgage. It can create stronger confidence for the lender in the borrower’s ability to pay back the loan. It is most beneficial when a small businesses owner has a tenant or two already lined up for the additional space. A letter of intent from a potential tenant will further cement confidence in the loan for the lender. It may also enable the borrower to obtain more favorable terms due to the promised income stream that will be generated.
Obviously, this may not work for every small business owner, but those that have the margin to do so should consider it. Not only can it help an owner free up capital that would be spent on their mortgage and create additional revenue, but it can also offer an immediate solution for expansion. It can be a challenge for small businesses when growth creates the need for additional space. Having that space already built can be an affordable and less taxing option rather than trying to find and move into a new space.