Purchasing Commercial Property
Commercial and semi-commercial property is becoming a more popular investment choice for landlords and more popular among businesses who would rather own their premises than continue to pay rent.
There are several points that are often overlooked when purchasing commercial property, here are a few of the more common things that often crop up.
Don’t forget that commercial property carries stamp duty also. Most lenders will assume you have allowed for paying stamp duty and very rarely will a lender ever ask whether you have the cash to finance it. Most mortgage providers offer a loan to value (LTV) in their highlight marketing however stamp duty is rarely mentioned. Don’t forget the cost of tax and plan for it at the outset. Most lenders don’t like financing stamp duty so plan for it before you start.
Some properties are registered for VAT, that means the property is the part that is VAT registered and not the trading business that occupies it. Check that the property is not VAT registered, if it is then bear in mind that you will need to pay the VAT then claim it back, if you are VAT registered yourself. If you are not VAT registered then you have an extra cost to consider, if in any doubt then get some advice from your legal or VAT advisory before you get too far down the line in buying.
More often we are seeing lenders not only ask for a deposit but ask where the deposit has come from. If you are looking at raising the balance of purchase then consider how you go about it and plan in advance. The best course of action is to get in touch and take some guidance. Remember that your deposit needs to cover the upfront costs of the purchase as well as the balance.
One of the other key things to know is how the lender is measuring their LTV. Some lenders will advance up to say 85%, however that may be 85% of the open market value of the property or 85% of the 90 day value of the property.
Valuers will provide a lender with two valuation figures, one being what the property is worth today and the other what the property would be worth if it had to be sold within 90 days (read a forced sale scenario). On average the 90 day value is 10% or so lower than open market which can dramatically alter what the LTV really means.
If buying as an investment then look at the leases within the property, take off any essential outgoings, then look at what is left. As a guide you will need rental income to cover the interest only costs of the mortgage to be covered by 110% to 125% as a minimum. Some lenders will look at the length of the lease as a guide to how long a term they will advance over, not all lenders do this so if it crops up then you will have other options.
Freehold / Leasehold
It is common for a freehold to be made of a ground floor commercial unit with flats above. The ground floor unit will often have the ownership of the freehold attached to it. When buying this type of property the option to purchase the freehold needs to be made to the other leaseholders first. It is rarely an issue as it is uncommon for a leaseholder to take up their option and pay out for it, however the period of notice you need to give can delay completion.
We did have a case this year that was repeatedly delayed for this reason as the notices were not correctly issued by the solicitor. Just be aware and raise it with your conveyancing solicitor at the outset.
Be aware of the upfront costs in mortgaging a purchase of commercial property. As well as the deposit you will need to budget for the following prior to getting a mortgage offer;
- Valuation of the property. Most commercial lenders want more detailed appraisals of commercial property
- Your legal costs. You will need to get some legal work done to establish the issues above
Once a mortgage offer is received and you move toward purchase then budget for;
- Mortgage arrangement fees, these can vary and we can help minimise these for you
- Legal costs of the conveyance
- Stamp Duty
- VAT if applicable
- Follow up to any issues raised in the survey/ valuation
If you are at all uncertain what these costs may amount to then ask questions of everyone until you know. It is also worthwhile getting the right solicitor to work on your case, commercial property is more complex and your normal family solicitor may not be the best person for you to use. Please ask us and we will give you the best contacts in each case.
It is common to hear a purchaser advise that the property has own type of use but that will be changed after purchase. Changing the use of commercial property is not always as easy as some people think. Speak to the local planning about change of use before you start.
It is also worth looking at the mix of commercial properties in the area you are buying. In these cases the law of precedent doesn’t work. Just because the local authority have granted a change of planning to one premise doesn’t mean they will to you, in many ways it makes it less rather than more likely.
Councils generally look for a mix of commercial property so there can often be seemingly little logic to how property use is decided.
For any questions about financing your purchase then please get in touch and we will talk you through each step of the way.
By Dave Farmer
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