With more and more businesses deciding to take the plunge and buying their working premises, Nick Terry explores the reasoning for making such a large investment
In these hugely difficult times for businesses, many companies are looking to secure their income, lower cost bases and cut expenditure back where possible, in order to be well positioned to make the most of the economic upturn as and when it does occur.
One of the biggest costs that many companies face, alongside that of their staff, is the cost of their business premises. As such, it may seem strange to be writing an article recommending ownership of a property rather than leasing, however read on and you may be surprised that the case for a purchase can actually be more compelling then first thought.
Be the boss
For a starter, if a company owns their premises then they do not have to deal with landlords. Ask any businessman who has dealt with office management side of things in the past and they are bound to have stories of the time that a landlord demanded they do this, resolved that; or perhaps they’ll prefer to tell you about the astronomical service charges they usually faced.
Clearly when a company owns the property they control the budgets, they prioritise the maintenance and ultimately it is they who can decide to put off the external repaint until business picks up rather than having no control over such decisions.
It’s not just money which can be saved on service charges though, with the recent changes to the International Financial Reporting Standards (IFRS) both operating and finance leases now need to show on the balance sheet in the same way. The upshot is that where the majority of future rental payments which were contracted under a property’s lease did not previously appear on the balance sheet, they will now.
This change will, on paper, dramatically increase many company’s stated liabilities. In reality many credit checking companies claim that they have been treating them this way for some time, but it will show quite a marked difference between those companies who can show their property as an asset (albeit potentially with an amount of mortgage debt) and those which have committed to long-term leases.
There are a plethora of other accounting advantages to owning the premises in which you work, many companies are able to offset interest payments on the mortgage against their profits and in some cases they may also be able to offset various improvement works.
Furthermore, paying money against a mortgage is adding to the company’s assets, whereas paying money on rent is ultimately taking away from the company.
Finally, there is the potential for additional revenue from parts of the property which may not be immediately required for owner occupation. Our company recently assessed one property where the business plan stood up and made sense in its own right, but then add in the fact that there was an additional 12,000 sq ft of space beyond the occupier’s requirements which we believe will provide nearly £500,000 per annum of income to the company, all of a sudden it makes for a very easy decision.
When all of these advantages are added to the low cost of commercial property at the moment, relative to the last four or five years, and the historically low interest rates which are prevalent right now, then there is a compelling argument to put money into your company in this way, hence protecting the company from future rent increases and potentially providing a source of additional income.
Looking to the future
Naturally, as with everything, there are two sides to every story and there are some downsides of property ownership which companies should be aware of. My colleagues who are experts at leasing premises for their clients will tell you that a lease gives greater flexibility to expand or change location, that a lease has lower up front costs and that with many leases the ‘headaches’ of managing a property are taken away from you.
My response to this is to ask what impression it gives to clients and staff to keep moving offices (asides from the cost associated with moving), how often is this really a realistic solution? In terms of the up front costs, yes, purchasing a property is a big investment in the company, however this is exactly why it should give staff further confidence as they will see the belief that management has in the company and could defiantly be inspired through this.
As for the headaches surrounding management of the property, if extensively planned and appropriate advice is taken, then the administration of most properties shouldn’t be overly onerous. Considering when compared to the aggravation gained through nagging, unresponsive landlords.
However, as with any major business decision, it should be made with carefully deliberated advice and using suitably qualified professionals whether that is to source, negotiate or deliver the property. Quality advice, particularly on something of this magnitude can save a company thousands.
Nick Terry is head of Investments and Capital Transactions at DeVono Cresa Property Ltd, firstname.lastname@example.org / 020 7096 9911