"Rent or Buy: Navigating the Commercial Property Dilemma for Your Business."
"Rent or Buy: Navigating the Commercial Property Dilemma for Your Business."
Choosing between renting or buying a property for your business has a variety of critical considerations that impact the decision. We will discuss the most important parameters to assist in making the decision specifically pertaining to Commercial and Industrial properties.
Market conditions
Timing is one of the critical factors that could lead to a significant price fluctuations in the price of property in the short term however historically real estate has proven to be a secure long term investments.
Creation of a Propco for the acquisition of the property
Commercial properties generally are best suited to be acquired into a Propco (property company), which will become the Landlord and the Trading company (business entity) will be the Tenant. The Propco is more easily tradeable as a separate transaction from the Trading company especially where the Trading company needs to unlock capital and remain in occupation of the property. This is known as a sale and leaseback transaction.
Will a business property save me rent?
Many clients show frustration at creating wealth for a Landlord and believe that buying a property for their business can potentially save rent. While this approach is valid one should separate the Propco from the Trading company in order to ensure a market related rental and the Propco maximises its return on the investment.
Opportunity cost
Most companies will often show higher returns by investing surlus funds into Trading operations so an investment rather than property. The next consideration should be whether a business property will return a higher value than other types of investments such as residential properties or equity markets.
Loan to Equity
Unlike residential property transactions, financial institutions typically require around 30% equity, providing a 70% mortgage on the market value. This together with relocation costs and either VAT or transfer duty can lead to significant and often unaffordable upfront payments.
Affordability
Financial institutions will assess the financial ability of the company to repay the monthly mortgage payments. This includes evaluating the net asset value of the guarantors and their capacity to cover any outstanding debt in the event of a default
VAT vs Transfer duty
A property transaction can be calssified as a VAT transaction where both the Seller and the Buyer are VAT registered. This will require additional short term cashflow as the VAT rate is higher than the rate of transfer duty. Any VAT paid can be claimed back in the next VAT return as opposed to transfer duty, which is only deductible from CGT (Capital Gains Tax) when the property is sold.
Conclusion
Careful consideration should be taken of all the factors when making the decision to Buy vs Rent a business property. It will always be helpful to discuss the detail with property and financial professionals prior to any final decision.