So, why should I purchase my own commercial premises?

So many of us own our own residential property but so few own the freehold premises which our business trades from!

It’s commonly said that in the UK we are a nation of homeowners, in contrast with our European friends who prefer generally to rent their homes. Despite this, a vast majority of business owners either trade from home or, if they do require offices or a factory, either prefer to rent their premises on commercial terms or don’t understand the benefits of property ownership.

The reality is that there are many benefits to renting your premises.

These include:

■ The ability to leave the premises if required due to the business folding, outgrowing the premises due to a business expansion or a disagreement with the landlord. Most commercial leases have break clauses and all have a fixed term after which there are no restraints to remaining there.

■ Depending on the nature of the lease signed, it’s possible that any significant work required to the property falls to the landlord to pay, not the tenant. This can include structural work, electrical work or even damage resulting from natural disasters.

■ During recent economic uncertainty, landlords have been compelled to offer leniency to tenants regarding non-payment or underpayment of rent. This won’t have a negative impact on the tenant’s credit history, unlike if they missed a mortgage payment which can leave a ‘footprint’ on credit history which can take months, if not years, to shake off.

Despite all this there are an enormous number of reasons why you should consider buying your own freehold to trade from, irrespective of the nature of your industry.

It’s generally more affordable on a monthly basis to buy than rent.

Yes, as with residential property, it’s likely to be cheaper monthly to pay a commercial mortgage than rent the same unit.

A standard recent example was a gym I was referred to, which was paying £36,000 rent annually for their premises (this was fair market rent for this particular property), but they held an option to buy the freehold which they wished to take advantage of.

With this particular deal, a 25-year mortgage at an interest rate of 4% with a 25% deposit gave monthly repayments of £1583 or annually £18,996 – roughly half the rent paid!

In fact, if the client decided to overpay the mortgage with monthly payments in line with their current rent, they would be mortgage-free within 12 years!

If they paid the same amount as rent over the same period, they would have no tangible asset to show for it.

You will hold a long-term asset

Sadly, even after a lifetime of paying commercial rent, the landlord continues to hold the asset. In fact, I have seen multiple cases where a tenant who has been in situ for many years has paid the landlord’s mortgage off in full for them, after which the tenant moves on while the landlord can sell the property or continue to rent it out to another business.

By purchasing the property, you will continue to hold it even if your business fails, you move the trading premises or even if you sell the business. In fact, it’s reasonably common for an entrepreneur to sell the goodwill of their trading business while retaining the freehold ensuring that the new owner signs a long-term lease. This can continue to provide an income for the former business owner as well as the possibility to benefit from capital appreciation (a rise in the value of the property).

It can be more tax efficient

This is not advice – always consult your professional advisors such as your Accountant before deciding how to purchase a commercial property

It’s important to understand that there are multiple ways to purchase a commercial property

■ In personal name. i.e., Mr Jones is the sole director of Jones Roofing Ltd but when purchasing the property, he decides to buy it in his personal name and rent it to Jones Roofing Ltd. In this example, the business continues to remain a separate legal entity so its failure doesn’t lose Mr Jones the asset, and Mr Jones can offset the commercial mortgage interest against his personal tax return.

■ In a pension fund. Again, specialist advice is required, but often a very efficient way to purchase a commercial unit is through a SIPP (Self Invested Pension Plan) or SSAS (Small Self-Administered Scheme), both of which are available from a majority of financial advisors.

By purchasing a property through such a scheme, a trading business will be paying the pension scheme monthly rent, growing a director’s pension pot. For this to work the property must be 100% commercial (no upstairs flats for example) and the fund must hold significant value. To find out more about the rules of such schemes, please ask for specialist advice or visit a website offering such an overview

■ In a Special Purchase Vehicle (SPV). More commonly, I am seeing a separate company established solely for the ringfencing of a commercial property purchase, despite there being common ownership of this company and the trading company. This ensures, as above, the property is safe in the case of business failure, and the additional benefit of not impacting on personal tax if drawings are not taken.

■ In the trading business name otherwise known as the ‘old fashioned way’. Despite being seen as slightly antiquated by many professional advisors, there are some customers who still prefer to purchase the trading premises in the name of the trading company. This may be because they have built up reserves in the company name, they wish to use or simply a preference.

So, while there are obstacles to buying a commercial freehold such as raising a deposit (generally anywhere between 25 – 35% of the property value is required) and generally economic uncertainty, there are significant upsides as well which make it a viable option for business owners.

The good news is that, despite COVID restrictions and the recent economic downturn, the market for such mortgages is still reasonably buoyant. While High Street providers are reluctant to lend to all but the (what they deem to be) the very lowest risk clients, mainly those they already have as customers, there is a strong alternative marketplace providing a service level often above those seen with High Street banks and with comparable charges and interest rates.

James Blacklaws

JB Commercial Finance

James, an ex-banker, is a highly experienced and fully Independent Commercial Finance broker, authorised and regulated by the FCA. With whole-of-market access. He specialises in helping businesses declined by their banks; businesses looking to grow, survive and purchase commercial property.

07722 432128

james@jbcommercialfinance.co.uk

jbcommercialfinance.co.uk