Ahh, the age-old question: to rent or to buy?
If you’re a business owner, at some point you’ve probably stopped to wonder whether you might be better off investing in your own premises.
The truth is there are heaps of benefits to being your own landlord, and you might be surprised by how flexible the banks can be with this type of lending.
So, here’s what you need to know if you’re thinking of buying an owner-occupied commercial property.
What are the benefits of owning my own business premises?
The big one is the security and control it gives you. You’re never going to be at risk of not having your lease renewed because the owner decides to sell, or of being hit with surprise rent hikes.
Beyond that, should your business run into financial trouble at any point, you can choose to sell with a lease-back option – where you remain on as the tenant. Not only will that give you a nice cash injection, but having a tenant already locked in is a huge plus to any potential buyer (especially if you can commit longer-term).
If you’re not using the full space, you also have the option of getting other tenants in as a little side-earner. And when the time comes for you to get out of the business, you can hold onto the building and lease it to the new owner (or someone else) providing a great income stream into retirement.
From a cost perspective, how does buying compare to leasing?
In a low interest rate environment, your leasing costs will probably cover about 85% of your mortgage repayments. In a higher rate environment, like the one we’re in now, it’s probably closer to 75%.
You’re spending the money anyway – so why pay off someone else’s mortgage when you could be paying off your own?
Yes, you’ll be paying a little extra, but you get a whole lot of added benefit too.
What sort of deposit do I need to buy owner-occupied commercial property?
Thanks to the hefty deposit requirements involved when it comes to purchasing a commercial property as an investment, people tend you think you need a much bigger deposit than you actually do.
When buying a commercial property for investment purposes, you’ll need to front up with between 35% and 60%, depending on the type of property in question and lease profile.
But lenders tend to be a lot more bullish around owner-occupied commercial properties, because they’ve got more understanding and oversight around the quality and financial position of the tenant (i.e. you).
When you’re buying as an owner-occupier, banks are willing to lend up to 100% of the value of the property, if cashflows are strong and reliable and the balance sheet is well capitalised.
How will my loan be structured?
Typically, the loan will be split between the property-owning entity and the operating entity on a 65%-35% basis.
The majority of the loan, that 65% held by the property-owning company, is secured against the property itself. This portion of the loan will usually be structured on a 15-year amortising basis, or potentially interest only in some circumstances.
The remaining 35% would be an unsecured loan on a cashflow-type basis, to be paid off over five years. Lenders will want to see evidence of strong cashflows and a good, solid balance sheet for your operating business, so they know you’ll be able to meet the repayment schedule.
Generally, you’ll be required to put a cross-guarantee in place between the property company and the operating company, linking business cashflows to security. Whilst this is usually the preferred structure when ownership differs between property company and operating company, other structures can sometimes be looked at – such as one way guarantees.
Lenders will want to see a personal guarantee from the outset but as debt levels reduce we would seek to understand a pathway for these to be released if this was important to the sponsors. This would only be possible if debt was fully secured, and servicing was strong.
What sort of interest rates apply to commercial property loans?
When it comes to commercial lending, rates are decided largely based on risk to the lender. So basically, the stronger the financial position of your business, the better the rate you’re going to get.
That said, lenders are usually pretty competitive in this space, given they have the property as security. An indicative rate right now would be somewhere between 8.50% and 9.00%, subject to change over time and depending on your situation.
The same rate is usually applied across both parts of the loan, with a premium factored into the equation to account for the unsecured portion. The more unsecured debt there is, the higher the rate will be.
Sometimes the lender will set separate rates for the different parts of your loan, in which case the unsecured portion of the loan will be more expensive.
Can I sub-lease part of the property and still qualify as an owner-occupier?
You sure can. To meet the banks’ definition of an “owner-occupier” you need to fill at least 50% of the space – anything over that you’re free to do with what you like.
And getting other tenants on board can be a fantastic way to generate extra income, helping to fund the purchase and meet your repayments.
This also means you can sometimes afford a larger property than you need today, which is great for future-proofing if the aim is to grow headcount.
What other things do I need to think about when looking at buying a commercial property?
When tossing up a potential purchase, there are a few key things it pays to keep in mind, including:
- Your existing lease: are you able to get out of your current arrangement? How much notice do you have to give? And what costs might be involved?
- Moving in: what costs are involved in moving from your current premises to the new location?
- Existing tenants: is the property vacant, or tenanted? If there are tenants in the building, what are the terms of their lease?
- Doing your due diligence: especially checking the earthquake rating of the property, which should ideally be 67% or higher.
If you’re thinking of buying a commercial property for your business, it can help to have an expert on your side to walk you through the process. Get in touch today to chat to one of our friendly property finance team.