lease or buy?

[pinkybanks]

Are there any tax advantages to mortgaging a commercial property? This question stems from the fact if you sink a large deposit towards the mortgag say 30%e, then surly you can't claim against that at year end. So apart from ultimately owning the asset, you appear to be financial disadvantaged, or am completely wrong? Any advice guys. To lease or to buy?

[stcstc]

comon thing to do is you own the building yourself and rent it to the company

[prospero]

If it's a commercial mortgage or business loan, the interest charged (which is most of the payment in the early stages) is tax deductable. The capital part is what is paying off the loan and will be slowly increasing the equity of the property.

[pinkybanks]

Think I'll take professional financial advice in regards to the best way to go. I've done a little net research on investing in commercial property and I'm completely bamboozled. Looks like its a bit of a grey area to be getting involved with at the moment.
Its safe to say that this recession is hitting all areas and the commercial property sector is one that is potentially more volatile than I thought.

I've lots to learn, but keen to do so.

[pinkybanks]

Taken from open sourse material:

Buy Vs Lease

 

Every business is different and there are few common factors that should be taken into consideration while making a decision of buying the building space or to continuing to lease it. Main factors we are suppose to focus while moving in the commercial world



Property management

Cash flow analysis

Fixed Vs Variable Rates

Cash outlay

Opportunity cost

Growth consideration

Appreciation

Tax factors


We will take a look at some of the advantages and disadvantages of the above factors in purchasing compared to continuing to lease space

Property Management - Time is money. If you own a building, it needs to be managed. You can either hire out the function or do it yourself. Many businesses with long term growth plans buy a larger building than they need and rent out the expansion space.



Cash Flow Analysis - In order to really understand the financial aspect of purchasing a building, you need to prepare a detailed comparative net present value cash flow analysis which takes into consideration your predictions on the future including holding period, anticipated appreciation vs. rental increase, interest rates, and cost of expenses increases. It is a good idea to do three different analyses, optimistic, realistic and pessimistic, to help determine your margin of error.

Fixed vs. Variable Cost - When you buy a building, you have a good idea what your costs will be over the long term. This is especially true if you have a long term fixed rate mortgage. If you lease space, the market will dictate what you will end up paying for rent over the long run.

Cash Outlay - Typically if you are planning to purchase a building, you can expect to make a down payment of between 10% and 25% of the purchase price, depending on the lender and your credit. When you lease space you won't need to put down nearly as much. With good credit, the typical outlay is the first and last months rent which is only about 10% to 15% of the cash outlay required when purchasing a building.

Opportunity Cost - With the large outlay of cash required to purchase a building, the opportunity cost of that money needs to be taken into consideration. What return would you expect to receive on that money compared to the return you would expect to receive if you invested the money back into your business or into other investments?

Growth Considerations - The growth phase of your business should be a major consideration in making the lease vs. buy decision. If your company is relatively new and/or in a high growth mode, leasing would allow more flexibility and fewer constraints to that growth. On the other hand, if your company is mature and stable, buying space is great way to meet your future space needs.

Appreciation - One of the primary goals of buying a building space is to generate long term increase in value through market appreciation. A good idea in a healthy market and usually successful over the long term. It is usually a good way to add to your retirement fund, but keep in mind that recent commercial real estate cycles have come in 10 year periods.

Tax Factors - Lease payments are usually fully deductible, but many expenses of owning office space must be written off over longer periods of time of up to 39 years. The good news if you buy is that you get to take depreciation on the improvement portion of the property and can usually deduct all of your interest payments. When considering the tax factors it is always very important to consult with your attorney and tax professional about the legal and financial considerations to owning office space

Advantages & Disadvantages of buying a Commercial Property

Buying commercial premises can be a good investment - owning a property gives your business stability, and the property itself can become a significant asset. However, it is a major step, and before you commit it is important to think carefully about the pros and cons. Advantages of buying:

your mortgage repayment is likely to be similar to a rental payment on the same property

you aren't exposed to any hefty rent increases

you may be able to sub-let any free space, although you will almost certainly require permission from your lender to do so

interest payments on a commercial mortgage are tax deductible

any gain in value of the property will increase your capital


Similarly there are also disadvantages:



Unlike renting, you'll need to come up with a substantial deposit - this is money that might be used for more important business purposes.

If you own premises, you may find it harder to relocate your business, because selling business premises is not always easy. If you rent, you may be able to negotiate to end your rental agreement, or to find another organisation to take over your tenancy.

If you have a variable rate mortgage, you are exposed to increases in interest rates.

Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration and security.

Any loss on the value of the property will decrease your capital.


Advantages & Disadvantages of leasing/renting business Property

Leasing or renting an asset means you can free up working capital for use in other areas of your business and you don't need to take out large loans to pay for it.

You should think about leasing or renting equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally.

Advantages of leasing/ renting property:



you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money

you pay for the asset over the fixed period of time that you use it

as interest rates on monthly rental costs are usually fixed, it is easier for your business to forecast cash flow

you can spread the cost over a longer period of time and match payments to your income

the business can usually deduct the full cost of lease rentals from taxable income

you won't have to worry about an overdraft or other loan being withdrawn at short notice, forcing early repayment

if you use an operating lease or contract hire, you may not have to worry about maintenance

the leasing company carries the risks if the equipment breaks down

the leasing company can usually get better deals on price than a small company, and will have superior product knowledge

on long-funding leases you can claim capital allowances on the cost of the asset


Similarly disadvantages of leasing/ renting property:



you can't claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years)

you may have to put down a deposit or make some payments in advance

it can work out to be more expensive than if you buy the assets outright

your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate

leasing agreements can be more complex to manage than buying outright and may add to your administration

your company normally has to be VAT-registered to take out a leasing agreement

when you lease an asset, you don't own it, although you may be allowed to buy it at the end of the agreement

 

 

 

 

 

 

[blokman]

I tend to look at things on a simplistic level and apologies for that, but we purchase our commercial property, now is an excellent time to buy and to drive a fantastic deal, if you have the deposit available, probably on commercial in the region of 30%.

Our main property that houses the framing area is multi tenanted, so in effect my tenants provide me with free premises.
We have within our building, two shops, an office, a complimentary therapist and recently created three affordable studio spaces for local artists.

In addition, the property also has a gallery area and additional multi function room for painting classes, talks etc.

The "art" side of things provides the much needed income streams to the framing business.

If you can look outside the box, there are a variety of ways to get that additional income stream to support the core business so be flexible when considering what to buy.

[Gesso&Bole]

You can only spend your money once, but there can be advantages in putting down a substantial deposit on property, and then using the property as collateral to borrow money. This is one way of spending your money twice. If, over a period of years the value of the property increases more than you have been paying in interest, then you are quids in. If, being the operative word!

Another thing to consider, if you have the funds available, is to purchase the property within a SIP which is a pension vehicle that allows you (your pension) to have significant tax advantages, whilst your business pays rent to your pension fund. This is a very good approach for some folks, but professional advice is a MUST.

Then there are the day to day aspects to consider. Would you feel happier being in control of your own property, being able to improve and adapt, but have the responsibility for maintaining the building. Or would you, like Starbucks (who do not own any of their properties) prefer someone else to worry about the property, and get on with running your business.

Bad news is that a lot of UK leases are the worst of both worlds. You pay rent, have to deal with landlord, but also have a FRI (fully repairing and insuring) terms. So you maintain the building as well!

On a simplistic level, if you are sure you can make money, can find the right property, and have the cash to do so, then I would buy not lease.

[pinkybanks]

On a simplistic level, if you are sure you can make money, can find the right property, and have the cash to do so, then I would buy not lease.[/quote]


It’s such a massive decision to make. I see the benefits on both sides, and think I’d prefer to own (or partly own with bank), but my head tells me the market is very susceptible to a LARGE fall which may take a decade or so to recover from.
So many people are finding it more and more difficult to make a living, and closing their doors. The amount of vacant shops locally to me tell a very depressing story has resulted in an increase of available commercial shops to both buy or let.
It seems locally that landlords are trying to dump their assets now as its becoming more and more difficult for them to find people who wish to or can afford to go into businesses. We all know empty shops are costing the land lord money in mortgages and rate payments. I’d say their appears to be a mass exodus at the moment and fortunately for me there are some real bargains to be had, but I still feel that now is the perfect time to negotiate a favourable lease with a desperate landlord.
It’s clearly a good time to be entering the market if you have a degree a revenue at your disposal, but I still don’t know which way to turn.

[blokman]

I understand your dilemna and if you can find the ideal property to rent then you are in a strong position to negotiate a good deal on the lease, for instance request a break clause after say two years which allows yo to walk away if things aren't working out.

You will know your target area better than most and if you see a large number of vacant shops in your specific area, possibly look further afield, the rent may be higher, but the footfall and hence the chance of building a successfull business are that much greater, in other words, you get what you pays for!!!

From our point of view, a fall in property prices in commercial units isn't an issue in the short medium term and we have been fortunate to have kept our tenants over the worst of the recession.

If you can possibly buy, then look at ways of adding value to the property, either by obtaining planning consent, perhaps to convert upper floors to living accomodation, letting out surplus space to other tenants or simply by renovating a tired property but one that is structurally sound.
This way, if you do need to sell, you can come out with at the very least a small profit.

[pinkybanks]

Thanks guys for your opinions and advise. I've seen a couple of properties that are for sale,and have discounted both of them on the grounds that the area they were in were on the way down. I've contemplated looking at trying to locate space in a garden centre, in the same way you see Hot Tub sales etc, but think the outlay may be similar to buying a place with a 2bed flat above....my search continues.
.

[valpendleton]

Hello Pinkybanks. Do you want to stay in Stoke on Trent or would you consider moving to a new area?