Commercial Property Mortgage Rates Have Moved Sharply Lower In The Past 2
Months
In our last several posts we have been singing the praises of the new One Big Beautiful
Bill Act (OBBBA), specifically as it relates to 100% Bonus Depreciation when combined
with Cost Segregation depreciation methodology. In many instances buyers may now be able to recoup their entire down payments for commercial properties via federal income tax savings in the year of acquisition. To say that’s a game changer is an understatement.
But, that’s not the only good news we’ve gotten this summer. In just the past two
months, SBA 504 mortgage rates, a popular option for commercial and industrial owner/user buyers have fallen sharply, shedding 38 basis points to just 6.00%. While this is not a return to the
ridiculously low rates we saw back in 2021, it is significant, and the change came ahead
of this week’s Fed decision to lower the Fed Funds Rate by 25 basis points. That news
could help mortgage rates to decline further, but elevated 10-year Treasury yields, the
benchmark for commercial mortgages, don’t always correlate with changes in the Fed
Funds Rate. Click HERE for more on that.
So, let’s take a quick look at what this means from a number perspective on a
hypothetical purchase of a 10,000-square-foot industrial building in Anaheim for $380 per square
foot. Our purchase price is $3,800,000. Assuming a standard down payment of 10% or
$380,000, that leaves us with $3,420,000 to finance. For simplicity’s sake, we will
combine the 25-year conventional 50% 1st mortgage with the 25-year 40% SBA 504 2nd
mortgage. The combined payment at the 6.38% rate back in July would have been
$22,836/mo. That same combined loan today would be just $22,035, an $801/mo
savings. That amounts to an interest savings of $240,358 over the life of the loan. Not a
bad thing at all.
When we combine that lower payment with the tax savings that go with the benefits of
bonus depreciation when combined with cost segregation depreciation, the deal looks
even better. A rough estimate of the tax savings in year 1 is $246,000. We arrived at
that number by using 70% of the purchase price as our depreciable base ($2,660,000)
and assumed that 25% of that basis ($665,000) can be cost segregated and used as a
tax deduction in year 1. Multiply that by a federal tax bracket of 37% and the buyer
saves $246,000 in taxes, essentially recouping almost 65% of his down payment…all in
the first year!
That alone makes this a compelling scenario, but when combined with the lower
mortgage rate, it enters the no-brainer zone. And we are making conservative estimates here as to the cost segregation benefit. The actual number could be much higher depending on the level of improvements in the building. Fortunately, we have access to some sophisticated models through our cost segregation specialist and can get you a preliminary number overnight on any industrial real estate asset you may be considering.
If mortgage rates do follow the Fed as hoped, this scenario only gets better, but we’ve
been around long enough to know that the 10-Year Treasury yield is influenced by
several other factors outside the direct influence and immediate actions of the Fed.
Suffice to say, we are watching the situation like hawks. For now, that yield is running
just under 4.05% and commercial mortgage rates run 150 to 200 basis points higher
than that. Right now, some conventional first trust deed loans are running in the mid-to-
high 5% range with 25-year amortization, but they mature in 10 years. Financing
experts we talk to won’t be surprised to see rates go even lower in the next few months.
If nothing else, it’s time to get informed, consult with the appropriate experts and
determine whether of not all this could be used to your advantage.
Looking to buy, sell, or lease industrial real estate in Orange County, CA, now is a great time to make a move.
