Are you considering purchasing a property for your business office, factory, warehouse or retail store?
Buying a commercial property to house your business can be a significant milestone decision. At the start, you need to think unemotionally and objectively, mindfully separating the business from the property. Otherwise, there can be a tendency to miss the standard due diligence that a seasoned property investor will perform.
Do's and Don'ts
Do begin to assemble your property team of a finance broker, an accountant and a legal adviser now, to assist in making astute decisions that will benefit the future.
Don't get attached to a property that you love, but realistically, is unsuitable for the business. Alternatively, you don’t want to make a rushed decision and settle for something that seems good enough now, only to find it becomes problematic later.
How to approach buying your HQ
- What does the business need?
Assess your business requirements, including size, location, zoning, and growth plans. Growth (or shrinking) plans are vital considerations. If the entire space is not needed right away, consider leasing part of the property to generate extra income. Properties require ongoing management and maintenance, which you must factor into your 1-3 year cash flow forecasts to decide what you can realistically afford.
- Research the Market
Investigate suitable properties by location, price, size and specific needs such as easy access to main arterials and other services. Consider engaging a commercial buyer’s advocate who can do the legwork and negotiate on your behalf. They will also have additional off-market properties on their books.
- Choose the Ownership Structure
Decide who should own the property. Options here include personal names, company, trust, or even through a self-managed super fund (SMSF). The structure may ultimately impact tax and asset protection, and often these are in conflict, so seek advice from all areas to make an informed decision. Options for
co-buying commercial property may need to be explored.
- Complete “Normal” Due Diligence
Think like an investor even after you’ve found a property that meets your operational needs. Be diligent about reviewing all legal documentation, including council zoning and planning status. We have seen owners face unexpected complexities around building codes, environmental standards, zoning regulations, etc., which created restrictions on property usage.
Business property values fluctuate with economic cycles. Consider any impacts on future property value, such as rezoning, infrastructure and other nearby developments. Weaker economies can lead to lower commercial valuations, especially in areas with oversupply or weak demand. Look for signs of pending infrastructure contracts and similar community investments.
- Contingency Planning
If the business’s needs change and you decide to lease the entire property, there may be an extended vacancy period. Allow for lost income during that change, along with any upgrades, fit-outs, property management fees, insurance costs and the potential time required to deal with tenants throughout the lease. Be prepared to sell the property if needed.
- Financing Consideration - Tenancy Matters
Commercial credit providers will seek to understand the business rational behind the purchase along with evidence of sound financial reporting. The view of the Credit Provider will differ based on the status of the property and whether it is Owner-Occupied (OO) or Tenanted Investment.
A commercial property with an independent lease in place will draw focus on the amount and duration of the rental income to service the debt (known as Interest Cover).
As an OO, even if there is a lease, it will not be “arms-length”. So, the focus will turn to the earnings of the business as the “first way out” to retire the debt. Read about the Five Cs of Credit for further understanding.
Do the benefits add up?
Drawing on feedback from our clients, key benefits to take the leap to buy a Commercial HQ property include:
- Control
The freedom to change or customise the property to suit your business needs. No need to consult the landlord for approval. However, major repairs, improvements and unforeseen costs will be the owners’ responsibility.
- Long-Term Financial Security
Security of tenancy and predictable rental costs provide stability, enabling long-term business planning. In addition, portions of the property can be sublet, creating an additional revenue source.
- Potential Asset Appreciation
Business real estate may appreciate, though this is never guaranteed, of course. There can be some hedge against inflation too, as mortgage repayments may remain relatively stable, unlike lease costs which usually increase annually.
- Tax Advantages
Owners may claim tax deductions for expenses such as loan interest, property taxes, depreciation, and certain outgoings. Depending on the ownership structure, any GST incurred on the property purchase can also be claimed against the GST collected by the business.
Make a Strategic Decision
Property is not a liquid asset class so consider your long-term business strategy. We have seen numerous misjudgments made when buying owner-occupied commercial property, which have had significant financial and operational implications.
Professional advice from your property team is essential to ensure your purchase aligns with your long-term business objectives and the personal wealth strategies of the owners.
Ultimately, buying your commercial premises is a powerful property strategy that can give your business solid foundations, control, and new avenues for wealth creation if approached with due diligence and expert guidance.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au
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The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.