Do your research before signing any contracts
Small and medium-sized business owners who rent their business premises should take advantage of current market conditions to consider buying, say the experts.
This is a good time, says Paragon Lending Solutions sales executive Marc Levitt, as banks are now willing to offer loans of up to 80%, at very competitive interest rates, “which is historically unusual”.
Levitt says entrepreneurs, who invest a lot in fitting out their premises, could especially benefit from property ownership to reduce future risk.
Levitt adds any business that is considering trying to raise finance should prepare by making sure that all its financial affairs are in good order.
“Transactions like these tend to happen fast; if things get held up for several weeks because you don’t have a tax clearance certificate, or up-to-date financials, the whole deal can fall through.
“But if a business has a solid trading foundation, is well managed and financially disciplined, it’s in an excellent position to take on an investment in its premises.”
Advice to entrepreneurs willing to make the move? Key is to make sure you always ask the right questions before buying.
Getting answers that make the purchase a viable option may be akin to searching for diamonds – a sheer effort in digging for information, says Just Property Group’s chief executive Paul Stevens.
Margeret Nienaber, Standard Bank Group chief executive wealth, says it pays to do your homework ahead of acquiring a commercial property. This includes determining the vacancy rates under the current owner, current tenants and their rents, tenant turnover and which ones will renew their leases.
“Talk to store managers to find out what they like and dislike about doing business in the area. “Ask owners how they are doing financially and have their tenants ever defaulted on their rent, and then ask to see the seller’s cash flow statement.”
Stevens says the next issue to be addressed is the building’s zoning restrictions to ensure the property is zoned for the use for which you want it. To avoid this pitfall, he suggests you ensure you state in the deeds of sale that any outstanding transportation development levies are the seller’s responsibility.
Also examine the municipal plans and surveyor general’s property diagrams to ensure there are no servitudes, while lease agreements are scrutinised to ensure the details provided are accurate. Nienaber says making an error in zoning can be costly.
“If your business is an accounting firm, you will probably require commercial office space, while a medical building demands space with a higher density of parking.”
She adds: “It is essential to work with an agent who has commercial real estate experience so you are exposed to the best financial scenario. “Once you understand the ins and outs of commercial real estate investing, it can be extremely rewarding both financially and personally.”
Advantages and disadvantages of commercial property investment
● Commercial leases are longer than residential leases, with commercial tenants typically signing up for five years.
● There is less operational management and monitoring, usually requiring your attention only during working hours with the security company responsible at night.
● Tenants pay the rates and insurance.
● Regular income source in addition to primary revenue inflows with commercial properties generally producing an annual rate of return on the purchase price of 6%-12%, depending on the area.
● Commercial properties can be unoccupied for long periods.
● Typically have lower capital growth potential as the building occupies the bulk of the land.
● Requires professional help for maintenance and these costs must be included in the price evaluation for the investment. Commercial property management companies charge 5%-10% of rental revenues for their services.