Buying and owning commercial property brings extra issues to consider and address when compared to buying residential property.
There are two primary reasons you may decide to buy commercial property:
- as an investment to obtain rental and capital returns; and/or
- to secure an appropriate site to operate your own business.
Whilst it is important to ‘strike while the iron is hot’ a prudent buyer will have had an experienced commercial lawyer help in drafting the contract before signing.
Issues that should be considered as part of planning to buy the property include:
- Tax considerations:
- a) what is the most tax effective structure for your particular circumstances?
- b) how should GST be dealt with?
- Ask your accountant’s view BEFORE you sign a contract as changing entities after a contract is signed can incur substantial stamp duty and legal costs.
- Risk management strategies
- a) should this investment be in the same structure as other assets owned or should it be set up in a new structure?
- b) Is the ability to service loans dependant on income from the property – if so how strong is the lease and the finically sound is the tenant?
- What are your plans for the property and are they compatible with:
- a) any current leases in place?
- b) local area planning laws and restrictions?
In Queensland there is no such thing a “standard’ commercial lease, the terms vary depending on who prepared the lease and when. Leased premises should have the lease reviewed by an experienced lawyer and a report prepared. A property with a tenant that can leave on a month’s notice is a vastly different commercial proposition to a lease where the tenant is locked in for the next 7 years. The situation is different again if the property is under- rented or otherwise unsatisfactory to the owner but the tenant can force renewals on the same terms for the next 20 years!
It is important to consider the prospects of finding a new tenant if the existing tenant leaves the premises. When determining the viability of any commercial property regard should be had to:
- available car parking for customers and staff
- street frontage and exposure (some properties are self-advertising)
- nearby commercial premises and their tenants (will they add value to your property or detract from it?)
- potential costs of any necessary shop fit outs/alternations to the property
- aesthetic appeal is the premises inviting to prospective tenants and their clientele (this will greatly depend on the type of business using the premises);
- future growth and development of the area
- whether the use of the premises by a tenant is permitted by local and state government;
If there is already a tenant in the property, you should consider:
- the quality of the tenant (how long have they been at the premises and what is their business experience);
- the length remaining on the lease and any options to renew that may be available to the tenant;
- what are their obligations on expiry of the lease in terms of the state and condition of the property when their lease expires;
- what are your obligations in terms of maintenance and repair during the life of the lease.
Depending on the market and the property it may take several months or even years to find a new tenant that is willing to pay the same sort of rent as the previous tenant. If you are obtaining finance to purchase the property you will need to make repayments regardless of whether a tenant pays you. You need to be able to service this debt to avoid defaulting on any loan agreement. When budgeting you should allow for a transition period in which the premises is not tenanted.
As it can take some time to investigate all these things you may wish to secure the property by contract to some have certainty but also have the option of terminating the contract if the investigations are not satisfactory. This is often referred to as having the contract “subject to satisfactory due diligence”. Again, these types of conditions should be prepared by an experienced professional who understands your particular needs and concerns.
Unlike most residential purchases, commercial property is also subject to payment of GST in addition to the purchase price unless an exemption can be established. Generally speaking the most common exemption claimed is what is known as a ‘going concern’. If the property being sold is subject to a lease by the settlement. There are strict requirements in relation to being eligible for the going concern exemption.
Purchasing commercial property is a significant decision to make. Our experienced property law team can assist you with this process by preparing additional special conditions to a standard contract to suit your needs. We can also provide advice to you in relation to any leasing issues and future development considerations such as the present use and zoning of the property. We handle a variety of commercial property purchases from small commercial units to shopping centres and large-scale industrial complexes. We can assist you with every step of the process.
If you would like more information on these and related issues please contact Tony Randall, Aaron Davis of Byron Hunter from our Commercial Property Team.
Prepared by Byron Hunter
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.