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| Rent or Buy? |
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Sponsored By: King Sturge |
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As we are now used to the concepts of home ownership, for many,
the first thought may be to purchase premises, with the obvious benefits of
control and the added possibility that capital appreciation will, in the longer
term, bring additional financial benefits to the business.
Acquisition can be funded by a commercial mortgage, usually secured on the
premises alone, and as with domestic mortgages, interest-rate deals will be
available which will allow you to fix or track prevailing market interest
rates. This can provide the benefits of cost certainty at a time when your
revenue projections are uncertain and when, in the early stages, you have
significant other outgoings as you grow your business.
The benefits of control can be important and it may seem more efficient to be
able to make premises decisions yourself, without the need to negotiate with
landlords. In the early stages, you are likely to need flexibility As the pace
of growth and expansion can be uncertain. You may make errors of judgement,
requiring a change of direction, for example, more staff parking, greater
turning space for delivery vehicles than expected or clearer signage required
to attract passing footfall. Consider whether the freehold purchase would give
you greater flexibility and minimise risk, or whether in fact a lease
arrangement, with sufficient flexibility negotiated at the outset of your
lease, offers the optimum solution.
There are immediate downsides to freehold ownership. Firstly, the supply of
available freehold premises in the commercial sector is much more limited than
in domestic markets. The vast majority of commercial property is owned by an
investor landlord. Only relatively occasionally do properties become available
on a freehold basis, with vacant possession for owner occupation. Your surveyor
can advise you, or alternatively review the catalogues from the major
commercial property auctioneers, to form a view on the types and volume of
premises available in your vicinity. It may be that a freehold option is not
available to you in the timescale available.
Secondly, your bank will require a deposit against a mortgage, usually of
around 30% to 40%, and you must consider whether tying valuable capital up as
security for a mortgage is appropriate. Could capital be used more effectively
in financing other equipment, stock, recruiting personnel and covering other
overheads?
Many small business owners, with the development of self managed and self
invested pensions, have taken the opportunity to acquire business premises in
their own name or in partnership with co-directors, in the form of a pension
fund investment. You should seek careful financial advice and give careful
consideration to the tax and financial planning implications before entering
into these more complex arrangements. Linking personal and business finances so
inextricably may not be desirable in the longer term. What happens when you
come to sell the business? What happens if you wish to split with a business
partner at a later stage?
The vast majority of small businesses, and indeed businesses as a whole,
therefore occupy property on a leasehold basis, holding the premises for a
fixed period of time. This is often subject to the right to negotiate
subsequent extensions, giving the business valuable flexibility but also
providing certainty and protecting the hard-earned goodwill that a
well-established location provides a business in the longer term. In addition,
changing location frequently can incur large costs, particularly if there are
high installation costs for plant and equipment.
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For any more information or help please contact Jeremy
Day, King Sturge, Tel: 020 7493 4933
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