November 12, 2014

To buy or not to buy a commercial property

It’s tempting for business owners to buy their own commercial property – the reasons are many and varied. So what’s the right step for your business? Finding an answer requires some careful consideration. We look at the pros and cons of renting versus owning.

There’s no doubt it’s tempting for small and medium-sized enterprise owners to buy their own commercial property. The advantages are numerous and often similar to those that compel us to buy our own home.

Particularly appealing is the control you gain by becoming your own landlord. The potential for capital growth in the investment is also compelling, as is the fact that any renovations may be considered an investment. Buying allows for business continuation, at the same time enabling you to customise your property to best suit your business needs.

Jo Scrima, Director, Superannuation Services at MGI Adelaide, points out that your property and the equity it generates may even be used as security for other investments and it also makes sense from a tax perspective. “You may be able to get a tax benefit from depreciation on the building,” says Scrima. Then there’s buying a property with your self-managed super fund (SMSF) – while it isn’t always straightforward, it’s worth considering.

A new business proposition

However, it’s equally important to factor in the disadvantages before making your decision. As Scrima notes, there’s the risk it’ll move your focus away from your core business. “You can’t ignore the fact your business is becoming a property owner and moving into a new market.”

It may also require a large sum of capital and substantial start-up costs. “You need sufficient funds for the deposit, stamp duty and other costs associated with buying,” points out Chemere Brown, SMSF Solutions Executive at NAB.

You also need to consider switching costs. “These are considerably higher if you want to move locations, upscale or downscale,” says Scrima. At the same time, the decision-making process is far more laborious. “It might mean you hesitate to move when it’s ultimately better for your business.”

The freedom of renting

On the flip side, there’s renting, which offers considerably more flexibility to move if you outgrow your premises or if your business needs change. This may be particularly appealing to growing businesses. It may also mean you can afford nicer premises – an important consideration when your external image is critical to your business.

You could also benefit from the fact that landlords are becoming more innovative and flexible, says Brown. She points to the advent of pop-up shops and serviced offices for short-term hire, among others: “They can accommodate a multitude of business structures.”

At the same time, rent frees up capital for investing in other business-related activities. “Renting or leasing can be very beneficial,” comments Brown, “especially when the cost of the lease can be 100 percent deductible against business income if the property is used solely for the purpose of that business.” Goods and services tax credits may be available as well.

Of course, there are some notable disadvantages, such as being subject to a landlord which limits your control over the property. “There’s the potential for the future lease to be limited and/or withdrawn,” says Brown. “That could affect things such as your business location, clientele and capacity.”

Furthermore, a commercial tenant still pays the majority of the property’s running costs – which includes making any changes to ensure the rental property is fit for purpose. Brown adds: “You may do this at your own cost, yet once you leave the premises, you can’t take those materials with you to the next location.”

Meeting the needs of your business

Your business life cycle can greatly influence your decision to buy. If you’re focused on building the business, there’s a very good chance you’ll want to reinvest your capital rather than tie it up in property. The flexibility of renting when profits are low is also worth considering. “It’s harder to anticipate your business needs early on. There’s a very real risk you can over capitalise,” says Brown. However, it may be worth thinking it through sooner rather than later. “Property is sometimes vital for SME expansion.”

A great time to purchase may be when your business is stable and at the middle of the road. “That’s because being able to predict future needs consistently is essential,” says Scrima. That said, “you still need to assess whether the rental payments over a 20-year period would be more cost and tax effective than buying”, explains Brown.

There are other issues to weigh up if your business is in the later stages of its life cycle. “You have to consider how much longer you’re going to be in business,” says Scrima. “We see it with super funds. Someone who is close to 60 years old will come in wishing to borrow to buy a commercial property. You have to ask, ‘Is that consistent with my business goals or have I left it a bit too late?’.”

Decision time

Getting advice is crucial, whether it’s from your accountant or your Business Banker. “If you’re not sure what you should do, then it’s best to speak to the professionals who can do the numbers and analysis, and provide you with the best option for your business,” says Brown.

This article was first published in Business View magazine (Summer 2014). For more Business View magazine articles and interactivity, download the iPad edition for free via our app, NAB Think.

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