How Commercial Real Estate Ownership Gave MachineTek Stability & Room to Grow

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When CDC Small Business Finance featured MachineTek in 2018, owner Kevin Darroch was expanding his Carlsbad aerospace manufacturing business. Financing through the Small Business Administration (SBA) 504 loan program had helped him purchase the 21,000-square-foot facility where MachineTek operates.

Eight years later, the building that CDC Small Business Finance helped him purchase has helped the company weather a prolonged downturn and prepare for renewed growth.

Commercial Real Estate Ownership Helps MachineTek Weather an Aerospace Downturn

According to Darroch, business had been “rocking and rolling” until the COVID-19 pandemic disrupted aerospace manufacturing. Customers canceled or suspended orders, supply-chain problems slowed production, and MachineTek’s workforce dropped from about 45 employees to roughly half that number.

“The end result was everything just kind of stopped,” Darroch recalled.

SpaceX remained an important customer, but recovering from the downturn took years.

“We are alive and kicking, but we’ve been on life support for a while,” he said.

Throughout the downturn, MachineTek gained financial flexibility by owning its building. Having fixed mortgage payments allowed Darroch to plan for facility costs, even as the company’s orders declined.

Darroch said ownership also gave the company options for managing its financial obligations that would have been harder to arrange with a landlord.

As the Carlsbad property’s value increased and the remaining mortgage balance decreased, MachineTek had more options when it came time to refinance.

“The fact that the value of the building is much higher than the loan balance has allowed us to have a little more latitude,” Darroch said.

One of the things that allowed us to sustain operations and meet our financial obligations was the fact that we owned the building.

— Kevin Darroch, Owner, MachineTek

Owning a Building Provided Room to Grow as Aerospace Manufacturing Demand Returns

MachineTek is now expanding again. Orders are increasing, the company is working overtime, and Darroch is hiring to meet demand from existing and new aerospace customers.

“When we were growing up, there was only one space game in town and that was NASA,” Darroch said. “But today, there are five or six major companies developing rockets for payload delivery to low- and medium-Earth orbit as well as aggressive plans for moon landings and colonization; we are quoting and making parts for all those folks.”

As a result of this resurgence, MachineTek’s workforce is back to about 30 employees, with plans to grow to 45–50.

The building, originally purchased with room for expansion, already has the space for additional machinery and employees. That allows MachineTek to pursue larger orders without an immediate need for a larger facility.

MachineTek: Then & Now

	2018	2019
Employees	About 45	About 30 and hiring
Business	Rapid expansion	Renewed growth after a prolonged downturn
Facility	21,000-square-foot building purchased with SBA 504 financing	Same facility, with room to expand
Outlook	Growing aerospace and space work	Stronger orders, new customers, hiring, and overtime

Darroch’s Air Force experience continues to influence how he leads the company. He emphasizes integrity, discipline, clear communication, and clear expectations for employees. MachineTek’s general manager is also a former Marine who clearly shares these values.

“We take our obligations to [our customers] very seriously,” Darroch said.

With aerospace demand recovering, Darroch is looking toward “renewed growth even beyond our previous size.” The company can continue to increase production in the same building it purchased years earlier.

“We can expand right where we are.”

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Veteran-Owned Businesses Generate $1T in Sales Every Year, How SBA Business Loans Offer Key Support

Carlsbad, Calif.-based MachineTek — which precision-cuts, shapes, heat-forms and stabilizes a material called honeycomb — is one of 2.5 million veteran-owned businesses in the nation. Here’s another way to imagine the jaw-dropping impact of military vets: These firms are responsible for generating 5 million U.S. jobs and $1 trillion in sales a year. MachineTek alone employs 45 employees and has a hand in millions of dollars of aerospace parts a year.  

“When you hear ‘veteran-owned business’ you can bet it’s a well-run business operating with integrity,” said Darroch, a service-disabled veteran who’s helmed MachineTek for more than two decades.

Known for its in-house engineering expertise and personalized customer service, MachineTek has been on a trajectory of growth since it was founded. Increased demand from the major aerospace players, from SpaceX to Boeing, motivated Darroch about five years ago to focus on securing his business’ long-term future.

He accomplished that by buying a building with an SBA 504 real estate loan through CDC Small Business Finance, a leading small business lender.

Our team recently revisited Darroch and his business to check on their progress since obtaining this fixed-rate real estate financing.

Military Service Informs Founding of Veteran-Owned Business

After graduating from the University of Southern California in 1979, Darroch served in the U.S. Air Force as a fighter pilot and later in the reserve. He retired from the service as a lieutenant colonel in 2003.

Serving his country primed him for business ownership. The U.S. military, he said, is a no-nonsense organization that assigns you great responsibility at a young age and expects back from you a job well done.

“It allowed me to develop leadership and organizational skills to form and manage my own company,” he said.

In the late 1980s, he bought a business in Santee that specialized in aerospace machinery. And a small portion of that company involved honeycomb fabrication. The business eventually shuttered, mainly due to the departure of General Dynamics from San Diego County and the onset of a recession, he said.

The bright side here: Darroch saw opportunity in honeycomb fabrication, which was still a relatively untapped niche.

What is honeycomb? It’s a material that comprises the core of composite panels used in planes, spacecraft and other products. Think of a typical airplane wing. Using the sandwich analogy, the honeycomb is essentially the “meat” of the wing and the skins serve as the “bread.”

From a birds’ eye view, this material looks like actual honeycomb, the hexagonal-shaped waxy plate built by bees. Holding the manufactured version, you’ll notice it’s lightweight yet extremely durable, given the important roles it plays in the sky and in space.

This, Darroch determined, would be the future of MachineTek, which he launched in 1992. To be clear, the company doesn’t produce the raw materials that become the fabricated honeycomb components; that material comes from outside vendors. MachineTek’s job is to precision-cut, shape and heat-form the material to the customer’s specifications, preparing the part for the next stage of production.

Securing Commercial Real estate for Long-Term Goals

Fast forward two decades later to 2013, MachineTek is employing a dozen employees and is only one of six manufacturers in this specific niche nationwide.

By this time, he’s cultivated relationships with companies such as Goodrich to fabricate honeycomb cells for its Boeing 737 and 767 programs.

Also, at this point, Darroch had been leasing his Carlsbad, Calif. company building for about five years and has infused more than $1 million in tenant improvements into the space. The 21,000-square-foot commercial building houses MachineTek’s manufacturing operations and several pieces of expensive heavy machinery.

It was at this point MachineTek learned the building owner was considering placing the property on the market. He settled on the strategic move of trying to purchase the space they were occupying.

If at any point Darroch was forced to move, he realized, he’d be in dire straits — experiencing the high expense of moving the heavy machinery and losing the sunk cost of the tenant improvements.

“The cost of relocating a company of this size wouldn’t be cheap,” he said.

Darroch worked with Merri Adams, a senior commercial loan officer with CDC Small Business Finance, to obtain an SBA 504 real estate loan. This type of financing offers a low, fixed interest rate and only a 10 percent down payment from the borrower.

Adams and her team worked diligently to structure the deal to increase the chances of approval and funding. Not only was the loan approved, Darroch paid nothing out of pocket since past tenant improvements were counted as the required down payment from the borrower.

“I owe it all to you, Merri,” Darroch said in a recent reunion with Adams at Machintek’s headquarters. “It worked out very well for us…the building is well-suited for our specialized requirements and we are spared the cost and disruption of relocation.”

Post-business Loan Funding: Where is MachineTek Now?

If your landlord were to terminate your lease, would that jeopardize your business?

That is a key question all businesses should ask themselves, Adams said. And if the answer is yes, then you should seriously consider buying your own building to secure long-term security.

“If a landlord had placed the building on the market, Kevin’s business could have been in trouble,” she added.

It’s been four years since Darroch received the SBA 504 funding through CDC Small Business Finance. MachineTek has since experienced significant growth.

He’s increased his workforce from 12 to 45 and is continuing to hire “left and right,” he said. His book of business has also diversified. Roughly half of his clients are in the space industry, from Space X to Virgin Galactic.

The ramped-up demand for honeycomb fabrication has also meant the business has grown into the 21,000-square-foot building, which includes a mezzanine area formerly configured as a large office area.

“When you own your building, you secure your future,” Darroch said. “With fixed facility costs and guaranteed continued occupancy, building ownership allows for long-range budgeting and planning. And, of course, there is the potential for capital appreciation. Buying this building was the best decision we’ve ever made.”

Jobs created/preserved: 45