Taking on a commercial mortgage is a huge commitment in both time and money, and so ultimately, the decision to purchase your business premises will depend on a number of variables, including but not exclusive to the financial position of the company.
Why would you want to buy property for business?
There are certainly a number of advantages to owning your business property. If you own your premises, then you have greaterfreedomto use it in a manner that’s best suited to your business function and employees. This means you can decorate, make repairs and redesign as you wish, unlike in a rented property, which is likely to be quite restricted in what you can do with it.
When you rent property, you are at least to some extent at the mercy of your landlord. It’s not easy to move a business, so if there’s suddenly a hike in rent, you’ll need to find the extra expenditure to pay for it. If you own a property, you’renot subject to rental increasesand you can usually fix the interest rate on a commercial mortgage so there should be no unexpected surprises along the way.
Like any property, if the market improves or if you use the building wisely, you couldmake a profitfrom it. If, for example, you bought a blank canvas but fitted it out with all the things that businesses usually require, such as meeting rooms and a kitchen, then you might find that you can make a profit when the time comes to sell.
It’s advisable not to make too many structural changes that are likely to be unpopular with future inhabitants though, as this could actually put these people off buying in future.
Depending on your circumstances, you may be able tobecome the landlordand sublet part of the property to lessen your repayments. Alternatively, you might decide to move in the future but let this property instead of selling for an extra boost to your revenue.
Interest payments on commercial mortgages aretax deductible, which can be an effective way of reducing your business’ annual tax overheads.
Although you can’t claim capital allowance(AIA)expenses against the cost of a property purchase, expenditure on building fixtures such as sanitary ware and fitted kitchens, as well as certain integral fixtures of a building, including wiring, water systems, heating, air conditioning and lifts may qualify for plant and machinery allowances.
In this years’ budget, Cllr George Obsorne increased the capital allowance sum to £500,000 from just £25,000 until December 2015. This could be a handy bit of tax relief on any buildings work you need to undertake.
Key considerations for buying business property
All that said, it’s important not to get carried away with the thought of not paying out ‘dead money’ on rent. Many businesses choose to lease property and there are a number of really legitimate reasons why this could be the right thing to do, including:
- Tying up cash: you tie up capital which you might need to use elsewhere in the business, plus if the property loses value the business loses capital
- Responsibility: you become responsible for the maintenance, repairs and health and safety considerations of the building
- Less to lose:if something goes wrong and you have to close the business, you could lose the property too
- Inflexibility: owning a property makes it more difficult to move if the needs of the business changes. If, for example, you need to hire lots for staff but don’t have the room, it can take much longer to move to a more suitable location – this could negatively impact your company’s image or ability to operate effectively
- Deposit:commercial mortgages typically require a hefty deposit of at least 25% of the property’s value.
So if you’ve weighed up the pros and cons and are certain that a commercial property is for you, what costs should you anticipate?
Costs of a commercial mortgage
As we’ve already touched on, the first big payment that you’ll face in a commercial property transaction is thedeposit. In general, lenders will need at least 25% of the property’s value to be put down upfront.
Like when purchasing a residential property, you may also face other costs associated with your mortgage deal. This includesarrangement fees,valuation feesand, if you find a mortgage through a broker,broker fees. You can expect arrangement fees to cost between 1 -2% of the property’s value. Valuation fees are pretty much exclusive to commercial mortgages these days (as prices tend to be much more variable than for residential properties) and start at £500.
When buying any property, either commercial or residential, it’s advisable to call in a surveyor to check over the building before you commit. There are a number of reasons for this, but most importantly, achartered surveyor can help you determine three things: whether the price is right, whether there are any underlying structural problems, and whether your plans for the building are feasible. A surveyor will usually charge a fee of between 0.5 % and 3% of the total cost of purchase, depending upon the level of survey undertaken.
In addition, you will be responsible for paying thelegal feesof both the business and the lender. These can vary greatly from case to case, but as a benchmark, you can expect to receive costs of around £500 for each case.
Stamp Duty Land Tax (SDLT) is payable on the majority of commercial properties, as it applies to any business premises or land valued at over £150,000. Depending on the value of transaction, you will pay between 1 – 4% in stamp duty.
Don’t forget the extra costs
Like with residential property, the actual cost of buying business premises rarely ends with the price of acquisition.
Business rates are charged on almost all non-domestic properties. The business rates bill is an annual bill based on the ‘rateable value’ of the property. These valuations are carried out by The Valuation Office Agency (VOA) and are reviewed on a periodic basis. The last review took place in 2012, and next revaluation is set for 2017.
Sole responsibility forrunning costs or service charges(lighting, heating, any cleaning services etc.) now fall to you, and so before committing to purchase premises, you should ask to see an Energy Performance Certificate (EPC) and ensure that a copy is made available. These days, the seller is legally obligated to provide this prior to the property being marketed so you should never find yourself in a position where this information is not available.
Likewise, with ownership comes the responsibility for repairs and maintenance, which also has the potential to leave businesses facing substantial extra costs. As a precaution, it’s advisable to take out a buildings business insurance policy, which will cover you for damage through things like fire, floods and storms and vandalism. This is costed-up based on a number of factors including the age and structural integrity of your building and your postcode.
Purchasing a property is a huge decision that will impact your business’ finances in a number of ways. Before taking out a commercial mortgage, it’s advisable to familiarise yourself with all the costs – both obvious and less so – to ensure you’re making the most well-informed and lucrative decision.
For more information or for help or advice about an individual case, don’t hesitate to visit Aldermore’s commercial mortgages pages or get in touch with one of our expert advisors.
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