If you are about to buy commercial property it is useful to be as prepared as possible so that the process runs smoothly for you. As with any investment decision the process becomes easier the more experience you have and it is our aim to help you achieve success with the following tips.
Before you buy
- What are your needs?
Below are a few key considerations to bear in mind when you are buying using a commercial mortgage.
Who is your target audience? Be at the heart of the community that potential tenants will want to reach to ensure maximum footfall (village/town/city centre depending on the scale of your investment). For large out of town retail units consider who else operates out of the same park, are they prosperous, are parking facilities and access routes well planned and functional?
What is the quality of the lines of communication into the building (internet, phone, mobile signal). What is the provision for parking (does it match the capacity of the building?), is access good for deliveries, is there air conditioning/heating, bathroom facilities, lifts, can space be easily changed from fewer large units to many smaller units?
Can you save money by looking at out of town locations? Is there decent access to transportation routes? Are you close to a port? Would a logistics function have adequate internet/phone coverage? Is there residential accommodation close by to provide for employees?
Have previous occupants failed – if yes, why? Is there enough space on the premises to allow for growth or diversification? What are the parking facilities like? What competition do you face?
- Property valuations are much more specific
Unlike the residential market where it is much easier to establish value based on surrounding properties, commercial valuations can’t be easily assessed without expert advice. Unless you are looking at a like-for like space (such as small to medium sized retail or office units) the value of commercial property can vary widely.
- Longer average lease lengths
Tenants in a commercial property tend to have a longer lease period than residential occupants, and as a result voids tend to be fewer. However, in a struggling economy the cost of premises tends to be one of the highest to a business after employee costs, so any voids can be for longer periods.
- Terms of lease for any existing tenants
If you are about to buy commercial property which has incumbent tenants part of your process of due diligence should be to establish the terms of their lease. Specifically, how many tenants are there, do their contracts end on the same or different dates (will this cause any issues for you as the new landlord)?
Do the terms of the lease favour the landlord? Do the terms of the lease provide security in terms of length and stability?
- Incumbent tenants
If there are tenants currently under contract in the building, but you also have units within the premises that you need to fill, are their operations likely to inhibit the desirability of attracting other tenants? For example, the smell from a recycling centre won’t sit well alongside an office space where clients are going to be entertained.
- Maintenance and repairs
Unlike residential lettings, repairs and maintenance costs for commercial property usually falls to the tenant, so whilst you should attend to the upkeep of the property ahead of securing your first tenants, the costs thereafter will fall to them (unless of course you are an owner-occupier where you will still have to cover these costs, or at least share them with anyone else you are leasing to).
- Historic rental value
Unless you are purchasing a new build it should be possible to ascertain the rental value of the premises you are considering buying. Retail space is zoned and given attributed to an appropriate rent band; however this does not apply to other commercial property. Rental value is generally calculated by a price per square foot. Retail units and offices exclude toilets or internal structure like pillars, but industrial and leisure properties include this within the overall calculation of space.
- Local competition
One of the aspects comparable to residential property is the process of assessing the local competition. If the house two doors down has ensuite’s, a conservatory and an extension on the kitchen and you have no ensuite, no conservatory and a small kitchen, but you price your property at the same level, the chances are you won’t get a sale over the other property.
Similar rules apply with commercial property. If the building you are looking at is looking a bit down at heel, has no air conditioning and limited parking, but there is a shiny new unit down the road which does, you will need to factor this into the rent you will be able to charge, or you will need to renovate to match or exceed the specification of the competing premises. Alternatively, look at other locations where you face less competition.
- Operational considerations
There may be a property management team in place who are handling the operational side of the property (rental collection, tenant relations, service charges, contractors, supervising works etc.). If you are not intending to take over this role yourself it is worth ascertaining whether the current managers are doing a good job and if yes what they are charging. Speak to the tenants and the company themselves to get an understanding of whether you are happy to continue with their services. If not it may be worth speaking to local agents and getting quotes together so you can factor this into your calculations.
With all this information in mind your next steps will be to find a commercial property for sale (follow the link for advice).
If you are ready to start the process of applying for a commercial mortgage, our team of advisers will be pleased to discuss your individual requirements and can be reached on the telephone number at the top of the page.