Analysis is key before making decisions regarding business premises

Posted On Thursday, 14 May 2009 02:00 Published by eProp Commercial Property News
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With a growing trend towards people wanting to live and work in relatively close proximity in order to reduce travel time amid rapidly escalating traffic congestion, it makes sound sense for businesses to give consideration to the location of their premises

Geoff StroebelThis is in order to ensure that they are accessible to employees, says Geoff Stroebel, GM of Pam Golding Commercial (PGC).

"People are a key asset of any business and today it's no longer simply a case of ensuring your business is located in an area that is convenient to your business for moving raw materials and goods in and out, it's also about being conveniently located to ensure your staff can travel to work and back, easily and safety," he says.

Location, access to transport and labour, financial implications and the suitability to carry out the trade intended – these are all important factors impacting on the business owner in regard to business premises. As a result, a decision regarding location should be a business related choice, and not one of property ownership.

Stroebel says it may also transpire that it would be more favourable to rent than own your business premises.  While prevailing property market conditions have a major bearing on this decision, the key question facing the business owner is, is it appropriate to own your own business property or not.

"If you have purchased as opposed to leased your business premises, the major impacts are around cash flow of the business. When investing in your own property or properties you could very well be diverting your attention from your core business and as a result have in essence become a property speculator with cash flow and growth impacts for your business.  It's all about investing operational capital in core assets for the business.

"Looking at some of the key financial considerations, in terms of cash outlay, not only must you take into account any down payments - which could vary from 40 percent of the purchase price, depending on what level of financing is available, to two months rental on a lease agreement.  You also need to calculate the amount spent on lease payments versus bond repayments. And another simple question is whether it is possible that this cash could be better utilised being ploughed back into the business.

"Should the cash outlay be greater in the purchase option you could sell the property and lease it back at a cost effective rate, as relocation may not necessarily be advantageous if the business premises suit the needs of the business. However, a leaseback such as this should be structured to protect you as the tenant in terms of guaranteed tenancy as well as your cash flow, so a long term lease of say 10 years plus would be of benefit in securing a beneficial rental rate with acceptable annual escalations. Naturally new buildings are at a much higher rental with even escalations in older buildings being driven upwards into double digit figures. Bear in mind if you own office space it needs to be managed, especially if you have bought premises into which you intend to grow your business, and have therefore leased out parts of the building to provide interim rental income," says Stroebel.

As is evident, there are numerous factors to be taken into account in regard to the leasing versus buying decision.  In addition to a detailed cash flow analysis on the intended property to be purchased or leased, rental escalations, operational costs, capital appreciation and interest rate assumptions, there are also tax implications, including Capital Gains Tax.

Adds Stroebel:  "Already it's clear that when purchasing a property one has to start taking a view of the property market, which may be outside the core competency of the business owner.  The assumption made by most people is that the profit achieved on selling the premises, based on property growth, will easily offset the outlay in leasing, however this is not always the case.

"Obtaining advice from qualified professionals who are involved on a daily basis in the commercial property market can significantly improve and also simplify the decision making process. PGC will do an analysis of your property to determine what options are available to you, and can also structure an appropriate lease to meet your requirements, and offload your property to a suitable investor if required."

Last modified on Wednesday, 21 May 2014 22:23

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