Making a decision on whether to buy or lease your business property should not be taken lightly. Jennifer McGowan, commercial property solicitor at Birchall Blackburn Law, explains the pros and cons.
Buying your own premises can mean freedom from landlords and leases
Investing in your own property allows you the flexibility to use it in a way that best meets your business needs and those of your employees.
For example, you can redesign internally and externally, unlike in a rented property, where any alterations will be restricted by the terms of your lease.
Another advantage is the ability to relocate whenever you want, without being hamstrung by a fixed-term contract, perhaps with a number of years left to run.
Moreover, if you own your property, you’re not at the mercy of substantial rent rises. As you can usually obtain a fixed-rate commercial mortgage, there are unlikely to be any unpleasant surprises down the line.
The financial benefits of ownership
Just as importantly, if property values rise, or you make improvements to the building (such as adding meeting rooms) you stand to make a significant profit when you sell.
You can also sublet part of the property to generate an extra income stream and reduce your mortgage repayments. Another option is to let the whole property instead of selling it when you move on.
It’s worth keeping in mind too that interest payments on commercial mortgages are tax deductible and this can be a great way of lowering your tax overheads.
The importance of taking purchase costs into account
Of course, there can be downsides to buying your premises. The purchase inevitably ties up a substantial amount of capital that could instead have used to invest in business growth and development.
The first major cost will be the deposit – you will usually have to find at least 25 per cent of the property value upfront.
Other purchase-related costs also arise, such as arrangement fees, valuation fees and sometimes broker fees. Arrangement fees typically cost between one and two per cent of the property value, while valuation fees are upwards of £500.
Another purchase-linked cost is stamp duty, paid on all commercial properties with a purchase price of over £150,000. The duty is levied at a staggered rate above this threshold, beginning at two per cent and increasing to five per cent over an upper threshold of £250,000.
Think carefully about ongoing ownership costs
In addition, you should be aware that the property market can fall as well as rise, so you could be left with negative equity.
Fast access to the capital tied up in the property can also be problematic if you spot a fresh business opportunity that you want to take advantage of.
The regulatory aspect of owning a building is also important. As the property owner, you are responsible for the safety of the building, which means you must keep abreast of and implement fire and health and safety regulations – although some leases also come with these obligations.
You will additionally have to find ongoing overhead costs such as business rates.
Weigh up the pros and cons – and take professional advice
Buying a commercial property is a long-term financial commitment with major implications for business funding. So professional advice should be taken at the outset to ensure you make the decision that is best suited to your business and its commercial needs.