25-10-2007
You own your business – why not own your business premises?
by Karen Baldwin for Simply Business
Most independent shops, restaurants and bars are run from premises that are rented from commercial landlords. However times are changing and the commercial property market is booming – could now be the right time for high street businesses to consider purchasing their own space?
On high streets throughout the UK, much of the retail space is still owned by the council and let out to retailers. For independent shops and restaurants this has traditionally meant relatively low rents and opportunities for new businesses to flourish.
However, a trend has started which is seeing many local councils in the larger towns and cities selling their property portfolios in order to redirect the funds into improving services and facilities for the local community.
Relying on council-owned premises could be a mistake ...
Islington Council in North London is one recent example. The council has decided to sell buildings, including 222 retail units, on several of its historic streets in order to raise £50 million for the borough. Most of these shops were leased to small, independent businesses.
Amid concerns that the big property developer looking to purchase the properties would significantly hike up rents - squeezing out independent businesses in the process - the council has attempted to appease tenants by offering them the opportunity to match the developer’s bid for their property.
Part of the charm of Islington for residents and visitors alike is the character of the shops and retailers on the high street. Many members of the community are concerned that multi-nationals and “clone” chain stores will take over if small businesses are squeezed out, with local areas losing their individual identities and sense of community.
Business owners and community leaders are banding together to encourage consumers to support local shops and independent businesses, such as the family-owned cafes, butchers, bookshops, and boutiques that currently populate the high street.
One scheme in action, the Wedge Card, offers card holders discounts and special offers from hundreds of independent businesses and aims to revitalise local communities by offering an affinity scheme to customers using local shops and services. It also supports local charities.
The experience of the Islington shopkeepers has the potential to be repeated all over the UK. Therefore the option of buying business premises to guard against the threat of skyrocketing rents, and thereby ensuring the long-term security and viability of a business, is looking more and more attractive.
However, if you are a small business owner, how do you go about purchasing your business premises?
In the Islington case, the council asked the local traders to try to match the bid put forward by the developer, yet tenants were required to submit extensive financial details prior to the developer’s bidding process. This effectively meant that the council had ultimate power over the fate of many of the businesses.
When looking at purchasing your own business premises it is important to know your own financial capabilities and to have a proper idea of the current market price for the property.
A commercial mortgage is the most effective and flexible method of financing the purchase of business premises.
Commercial mortgages are similar to residential mortgages in that the lender has a legal claim over the property until the loan has been repaid in full. There are also similar choices to be made on the type of mortgage you need, such as whether you select a fixed or variable interest rate.
You can apply for a commercial mortgage whether you are self-employed, a sole trader, own a limited company or in a partnership. It is this legal structure of your business that will determine who is responsible for repaying the mortgage. For example, if you are a sole trader, responsibility rests solely with you. For partnerships, the partners involved are jointly and individually responsible.
What costs are involved?
As with all purchases of this nature, there are significant costs involved. A deposit is required – the larger it is, the more you will be able to borrow. In the majority of cases, 20% to 30% of the purchase price is required as a down payment, although it may be possible to negotiate a smaller deposit.
There are also legal and professional fees associated with the purchase of the property. Before you finalise your purchase and ownership of the property passes to you, you will incur several closing costs above and beyond the cost of the property such as title insurance, the site survey fee and various fees associated with preparing the legal documents.
The expected use of the funds you need to borrow is an important consideration – will the loan be used towards owner-occupied premises, purchase of a new business that comes with premises or for a development? Many commercial retail buildings come with residential flats above the retail unit. The rental income from this extra property may help towards covering the mortgage payments and thus help you secure the mortgage.
However, as with any significant business decision or property purchase, the first and most important step is to do your homework and thoroughly research your prospective premises.
If you own a shop or other retail business, an important consideration is the location of the property. Is there passing trade? Does it connect you with the right type of customer?
You should also seek an independent valuation of the property you are considering buying to ensure that the asking price is actually fair market value. If there is a discrepancy, you will need to negotiate with the vendor to see if the asking price can be reduced to what you believe it is actually worth.
Otherwise, you may have to consider buying another property that you believe is more realistically priced.
What are the benefits of owning your premises?
Ownership of your business premises not only provides security against the threat of rent increases or the possibility of your landlord not renewing your lease on its expiry, forcing you to move your business, but it can also provide significant financial benefit.
If you have paid a fair price for the property and you hold on to it long-term, there is a good chance the property will appreciate in value, providing financial gain if and when the property is sold. If it does appreciate, you may also be able to borrow against it in the future to fund expansion.
Commercial mortgages tend to be repaid over a shorter period than residential mortgages. Typically, a commercial mortgage is repaid within 20 years. However, once the mortgage is fully repaid you will then have significant cash flow benefit with fewer ongoing expenses and ultimately more profit in your pocket.
So why not find out how much you could borrow to buy your business premises? It could safeguard your business for years to come.
Thinking about a commercial mortgage? Then visit Simply Business Commercial Finance to learn more ...
