Is Buying or Leasing Commercial Property the Best Option for my Business?

Contents

• Buying a Commercial Property
• Leasing a Commercial Property
• Next Steps

Firstly let’s lay out the obvious differences in each property scenario. Buying a commercial property means you are using cash or a loan (or your SMSF) to purchase a property from a seller, but the property is owned outright by you once the loan is paid off. Leasing a commercial property means you are paying someone else who owns the property (landlord) to use the space for a period of time as a tenant.

It’s important to note that the decision to buy or lease is a personal one and depends on your business needs. We go through the benefits and drawbacks of both property options below to give you a good place to start.

Buying a Commercial Property

Firstly are you buying the property to run your business in or to lease out to another business? There are a few variables to consider in this case, but here are some of the key considerations that apply to each when buying commercial property.

Benefits

• If the commercial property is to be used to run your business it is possible to access small business Capital Gains Tax (CGT) concessions upon the sale or transfer of the property in the right situation.
• It gives you the security of having your own business premises rather than being at the discretion of a landlord.
• A commercial property owned by your SMSF has potential short term and long term benefits.
• If you are looking to lease out your commercial property to a business, gross rental yields are usually much higher than residential property, averaging 8-9% compared to residential property gross yield of 3-4%.
• Lease terms are generally longer than residential properties which provides security for tenancy and financing purposes.

Drawbacks

• The value of the property may not appreciate over a period of time like residential property generally does.
• Finance to purchase a commercial property is generally more difficult to obtain than a residential property.
• When interest rates are increasing, like they are at the moment, the financing costs of the property may have a larger impact on your cash flow.
• If leasing out the property it is generally harder to find tenants for a commercial property than a residential property.
• The option period within a commercial property lease is at the discretion of the tenant.
• During periods of disaster (e.g. COVID-19) many commercial landlords have been left with reduced rent due to no fault of their own and with little or no compensation or relief from the government.

Leasing a Commercial Property

The leasing of commercial property includes office space, retail shops (including those within a shopping centre), industrial units, workshops, warehouses, and other non-residential property. Committing to a commercial lease is as significant a financial commitment and legal agreement as buying a property, as there are a range of positives and negatives attached that it’s equally important to weigh up.

Benefits

• If flexibility in your business location is important for your business, leasing a commercial property is a great option in this situation.
• You have an opportunity to negotiate lease terms to suit your business including option periods that give you the discretion as to whether you take up these option periods.
• If you are investing your capital in areas such as human resources, technology and marketing, and don’t have the means to invest in property, then leasing allows this.
• Businesses in premier locations are cheaper to lease than buy, so in the instance that a prime location is needed for your business this is important to factor in.
• We have seen that during COVID-19 the government stance is generally pro-tenant, in that it mandates landlords to enter into negotiation with tenants in distress to produce an acceptable outcome, including rent reduction and deferrals.

Drawbacks

• In some cases, generally depending on the location of the property, renting is actually more expensive than paying interest on a loan for a bought property.
• If you intend to sell your business and assign the lease over to another person, or vacate the lease before the expiration date, this can be problematic if you haven’t negotiated these terms before signing the lease.
• The landlord has the power to increase the rent payable which can make it difficult to manage cash flow.
• The landlord may also choose not to renew the lease after it has ended, which means you may need to look for a new premise.
• To make changes to the property to make it suit your business operations you need landlord approval before going ahead.
• In a situation where rent is not paid on time or the premises is not maintained, you can be in breach of your lease potentially resulting in rent recovery action or lock-out measures by the landlord.

Next Steps

Make sure your property decision is the best course of action for your business, because every person's business and property situation is different. Given the impact COVID-19 has had on both businesses and the property market this is even more critical now. However if you think about your own circumstances and run through the above benefits and drawbacks, this is a good place to start.

Keep in mind that getting in-depth insights about your course of action from a business adviser or accountant will prove extremely valuable and provide peace of mind. If this is an area you would like to investigate we encourage you to talk with us. You’ll gain a one-on-one chat with one of our Directors, who will guide you through strategies and solutions to suit your situation both now and in the long-term. BLG Business Advisers are Wollongong Accountants who service all over Australia, and our team believe in the true meaning of service and support. They will gladly share their experience and insights to get you the results you are looking for.

Whatever you decide we wish you every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*