Building for the Future

Commercial property: Should you buy or rent your business premises?

What to look out for

  • Red Property ownership can tie up a large amount of cash which could be used to generate income
  • Amber As the owner, full responsibility for the property and associated costs sit with you
  • Green You are in control! Use the property how you wish without having to run any changes past a landlord

We like to have our money in bricks and mortar and own our own homes, but what about your business premises? Explore your options for commercial property ownership and finance.

Should I buy or rent my business premises?

Both options have their pros and cons but ownership does put you more in control of your destiny, always assuming the premises you are buying are a good long-term solution to your needs.  Ownership means you benefit from any long-term increase in the value of the property and grow your own asset base, rather than “throwing money” away on rent.  It also makes your balance sheet look stronger and can enhance other peoples’ perception of the stability of your business.

Why does buying my business premises put me more ‘in control’?

Well, if you want to make alterations to the building or you have surplus space that you want to let to someone else, you can do these things without having to get permission from your landlord.

What about the downsides of ownership of commercial property?

If the roof is leaking, for example, you pick up the bill for repairs. Also, property values can go down as well as up, although any loss only becomes an issue when you actually sell it. If the building is still meeting your needs and you are covering borrowing costs, then this shouldn’t be an issue. You will face significant up-front costs such as legal fees, valuation, SDLT (Stamp Duty and Land Tax) which make it an option for the long haul. The other downside is you are tying up capital. Do I spend cash on premises or buy more stock to trade instead?

Should I buy business premises in my name or through my company?

A key benefit of buying in your own name is that you can let the premises to your business, giving it some control, albeit via yourself. Later, if you sell the business then you can retain the property giving you a continued rental income stream, either from the buyer of the business or via a re-let.  This can also make a business sale easier, as the property may not be included. If anything happens to the company, then the property is likely to better protected if it is privately owned. On the other hand, you can boost the value of the company balance sheet by buying the property through the business. Finally, where are you going to fund the purchase from? If the money is in the company and you want to buy the property in your name, you will need to find a tax-efficient method of withdrawing those monies. You should seek professional advice.

If I buy privately, can I charge my company the rent of my choice?

Two things to bear in mind here. Firstly, as a director you are obliged to act in a commercial and responsible manner for the company, including not taking on unreasonable liabilities on its behalf e.g. paying twice market rent.  Secondly, whilst HMRC are likely to take a bit of a view of a “toppish” rent being paid, this will not extend to paying way over – or under - market rent e.g. to avoid personal or company tax obligations.  The short answer is therefore no, the terms of the lease should be reasonable.

How to buy commercial property

Unsurprisingly, not many individuals or companies carry enough cash to buy property outright and commercial mortgages are often available for up to 70% of the cost of the property, repayable on terms of up to 30 years.  Such commercial mortgages can usually be arranged with variable or partially-fixed interest rates.

What if I don’t have cash for the other 30%?

It is sometimes possible to leverage – borrow against - other assets that you already own to raise additional cash through a commercial property loan.

For example, if you have an unencumbered debtor book, you might be able to raise up to 80% of its value as cash using Invoice Finance, or raise Asset Finance against your existing vehicles or against personal assets, such as your home or pension.

The key thing here is to make any potential lender aware of all of your assets, so that they can look at potential options with you.  Remember also that if you do borrow in any of these ways, then this borrowing has to be serviced alongside your new commercial mortgage.

And as I said earlier, where the “contribution” is coming from is also likely to influence what name the property is purchased in.

Long or short-term solution for your business?

Property purchase is definitely a long-term option; if your needs are short term, then renting is generally a better approach.

Useful links

Business loans: How to bring cash into your business

Business funding: How to decide on the right type of finance

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