Buying an office for the company - what should I consider?
Discussion
An opportunity has come up to buy an office for my business. The trouble is, I've only ever bought residential houses in the past (and only ever 2 of them at that) so I don't know what questions I'm supposed to be asking. I go around to look at it and I'm very much like a residential house buyer thinking "Ohhhhh.. I don't like that paint, I'll re-do that... and I'll move that there... " etc. In short, I haven't got a scooby.
What thinks should I be considering? For example:
- A residential house is a residential house. But commercial property has all sorts of banding A1, A2, B1, B2 etc that designate what they can be used for. Obviously my solicitor will check the office has appropriate consents but what is the summary of how all this works.
- How does one price commercial offices? It's in £ er square foot or something right? I guess just to make sure I'm paying a fair price I should look at other local sales, right? The market is him so that could be tricky. Any other suggestions? What does office space generally go for?
- How do I know what the annual Business rates are? I've been given a "Rateable value" but that's not it, is it? It's apportion of that or something isn't it?
- The office is in a residential area so I feel there may be an option in a few years to come to convert the usage to residential and sell to a developer. It can't be that easy though, can it?
- When buying an office, are there things such as those Energy Efficiency ratings you get with houses? What do I look out for?
- Is it rude to go in and ask for a broadband speed test to be done while I'm watching? Broadband speed is an issue in rural Bucks where this office is.
- I guess that like buying a residential house, I should get a structural survey done, right?
- There is a tenant already occupying half the building on a 5 year lease - suits me fine, nice bit of yield - can I assume I'll just take over being his landlord and continues to pay me without any change to his contract?
- What's the deal with commercial tenant leases? I've been told the tenant pays the rent, pays their own rates and utility bills and are responsible for repairs to their part of the building. Sounds too good to be true, have I no responsibilities here and just cash a cheque every month - can't be that easy, right?
- Part of the attraction of this property is that tenant lease. On that basis, do I need to do a credit check on this business to make sure it's solid and will continue to pay? Would it be rude to ask them for accounts, credit checks etc.?
So like I say, not a scooby. Can you advise a novice on what to do here to save me making a costly error? Thank you.
What thinks should I be considering? For example:
- A residential house is a residential house. But commercial property has all sorts of banding A1, A2, B1, B2 etc that designate what they can be used for. Obviously my solicitor will check the office has appropriate consents but what is the summary of how all this works.
- How does one price commercial offices? It's in £ er square foot or something right? I guess just to make sure I'm paying a fair price I should look at other local sales, right? The market is him so that could be tricky. Any other suggestions? What does office space generally go for?
- How do I know what the annual Business rates are? I've been given a "Rateable value" but that's not it, is it? It's apportion of that or something isn't it?
- The office is in a residential area so I feel there may be an option in a few years to come to convert the usage to residential and sell to a developer. It can't be that easy though, can it?
- When buying an office, are there things such as those Energy Efficiency ratings you get with houses? What do I look out for?
- Is it rude to go in and ask for a broadband speed test to be done while I'm watching? Broadband speed is an issue in rural Bucks where this office is.
- I guess that like buying a residential house, I should get a structural survey done, right?
- There is a tenant already occupying half the building on a 5 year lease - suits me fine, nice bit of yield - can I assume I'll just take over being his landlord and continues to pay me without any change to his contract?
- What's the deal with commercial tenant leases? I've been told the tenant pays the rent, pays their own rates and utility bills and are responsible for repairs to their part of the building. Sounds too good to be true, have I no responsibilities here and just cash a cheque every month - can't be that easy, right?
- Part of the attraction of this property is that tenant lease. On that basis, do I need to do a credit check on this business to make sure it's solid and will continue to pay? Would it be rude to ask them for accounts, credit checks etc.?
So like I say, not a scooby. Can you advise a novice on what to do here to save me making a costly error? Thank you.
Some answers below;
What thinks should I be considering? For example:
- A residential house is a residential house. But commercial property has all sorts of banding A1, A2, B1, B2 etc that designate what they can be used for. Obviously my solicitor will check the office has appropriate consents but what is the summary of how all this works.
Use Classes Order – see PDF at www.gva.co.uk%2Fplanning%2Fuse-class-order&ei=...
Offices are B1(a)
- How does one price commercial offices? It's in £ er square foot or something right? I guess just to make sure I'm paying a fair price I should look at other local sales, right? The market is him so that could be tricky. Any other suggestions? What does office space generally go for?
As an investment, it depends upon the security of the income. A long lease to Lloyds Bank with fixed uplifts might go for 20x the rent (5% yield), whilst an office let to Bodgit and Scarper LLP in a location which is difficult to relet and is overrented might go for a fraction of that. In the trade, for vacant offices I would always start with 10x the rental value and work up and down for local factors, but that is just the very start of the valuation process. A Registered Valuer (I am one, amongst other things, but don't worry, I'm not after your business!) would check what similar properties had gone for and would do a detailed analysis.
- How do I know what the annual Business rates are? I've been given a "Rateable value" but that's not it, is it? It's apportion of that or something isn't it?
It is the Rateable Value time the Multiplier – see here for the multiplier;
http://www.2010.voa.gov.uk/rli/static/HelpPages/En...
You are probably 0.482p in the £.
- The office is in a residential area so I feel there may be an option in a few years to come to convert the usage to residential and sell to a developer. It can't be that easy though, can it?
There are permitted development rights currently, so it could be very easy now and much more difficult when they fall away. You will need professional planning advice to get this one right. Some will say "go and see the local planning authority". Having won lots of planning permissions including on appeal and against officer recommendations (which really annoys them!), I say get proper advice.
- When buying an office, are there things such as those Energy Efficiency ratings you get with houses? What do I look out for?
The office will have to have an EPC, similar to a residential one, before it can be sold. They have detail on the efficiency or otherwise of the building in the report.
- Is it rude to go in and ask for a broadband speed test to be done while I'm watching? Broadband speed is an issue in rural Bucks where this office is.
Why would it be rude? You are about to make a major investment – you'd test drive a car!
- I guess that like buying a residential house, I should get a structural survey done, right?
Yes.
- There is a tenant already occupying half the building on a 5 year lease - suits me fine, nice bit of yield - can I assume I'll just take over being his landlord and continues to pay me without any change to his contract?
Yes, subject to legal checks.
- What's the deal with commercial tenant leases? I've been told the tenant pays the rent, pays their own rates and utility bills and are responsible for repairs to their part of the building. Sounds too good to be true, have I no responsibilities here and just cash a cheque every month - can't be that easy, right?
It can be, but it depends on the lease. If they occupy the property on a Full Repairing and Insuring Lease (FRI), they are responsible for pretty much everything. If they occupy part, there might well be a service charge to cover expenses, but you or a manager have to run it. If they are on a licence or an unusual type of lease, they may have avoided these liabilities. Your solicitor needs to do a full analysis and report.
- Part of the attraction of this property is that tenant lease. On that basis, do I need to do a credit check on this business to make sure it's solid and will continue to pay? Would it be rude to ask them for accounts, credit checks etc.?
Yes, do credit checks. Yes, get accounts from them (preferably) and Companies House if you can't. Go and speak to them when you inspect, if you can.
Hi, Loafer123 is right on what he says. The issue over price/value will be something that is subjective until such times as you might need a commercial loan as any bank/building society will require a formal valuation (from someone such as Loafer123 as a registered/approved) to support any loan application - a formal valuation will confirm the value of the premises at the date of the valuation and based on the previous sale information available and the valuer's experience. You will pay for a formal valuation as it also gives you the opportunity in the unfortunate event that the valuer gets it wrong (and you are at a financial loss) that you can pursue the valuer and their professional insurers for the loss.
You should also ask the seller for a copy of the signed lease to the tenant and also for confirmation on the payment history of the tenant during their occupation?...have they paid on time and do they pay by cheque/electronic transfer etc? The lease will state legal responsibility for repairs, who pays the utility bills and also importantly what legal rights the tenant has on the expiry of their lease & also if they default during the lease? - renewal rights etc are important if you find you want the tenants space to expand into at some point in the future.
You can pay & do a Land Registry check online to see the history on the property, when the current owner bought it & also (dependent on when they bought it) how much they paid for it? Also, if you are patient, you can do an online planning history check on the property or arrange an appointment with to local Planning Department to inspect the planning history gild on the property.
If in doubt, go onto the RICS website and find a local surveyor who you can employ to negotiate on your behalf with the seller as it sometimes helps to stand back/detach yourself from the negotiations.
Finally, ask for the certification for things like the boiler/air conditioning system (if present) servicing and the wiring checks etc as you don't want to buy something that isn't well serviced/looked after.
You should also ask the seller for a copy of the signed lease to the tenant and also for confirmation on the payment history of the tenant during their occupation?...have they paid on time and do they pay by cheque/electronic transfer etc? The lease will state legal responsibility for repairs, who pays the utility bills and also importantly what legal rights the tenant has on the expiry of their lease & also if they default during the lease? - renewal rights etc are important if you find you want the tenants space to expand into at some point in the future.
You can pay & do a Land Registry check online to see the history on the property, when the current owner bought it & also (dependent on when they bought it) how much they paid for it? Also, if you are patient, you can do an online planning history check on the property or arrange an appointment with to local Planning Department to inspect the planning history gild on the property.
If in doubt, go onto the RICS website and find a local surveyor who you can employ to negotiate on your behalf with the seller as it sometimes helps to stand back/detach yourself from the negotiations.
Finally, ask for the certification for things like the boiler/air conditioning system (if present) servicing and the wiring checks etc as you don't want to buy something that isn't well serviced/looked after.
loafer123 said:
- How does one price commercial offices? It's in £ er square foot or something right? I guess just to make sure I'm paying a fair price I should look at other local sales, right? The market is him so that could be tricky. Any other suggestions? What does office space generally go for?
As an investment, it depends upon the security of the income. A long lease to Lloyds Bank with fixed uplifts might go for 20x the rent (5% yield), whilst an office let to Bodgit and Scarper LLP in a location which is difficult to relet and is overrented might go for a fraction of that. In the trade, for vacant offices I would always start with 10x the rental value and work up and down for local factors, but that is just the very start of the valuation process. A Registered Valuer (I am one, amongst other things, but don't worry, I'm not after your business!) would check what similar properties had gone for and would do a detailed analysis.
@loafer123 - this was a great answer. Thank you so much for taking the time to be so detailed.As an investment, it depends upon the security of the income. A long lease to Lloyds Bank with fixed uplifts might go for 20x the rent (5% yield), whilst an office let to Bodgit and Scarper LLP in a location which is difficult to relet and is overrented might go for a fraction of that. In the trade, for vacant offices I would always start with 10x the rental value and work up and down for local factors, but that is just the very start of the valuation process. A Registered Valuer (I am one, amongst other things, but don't worry, I'm not after your business!) would check what similar properties had gone for and would do a detailed analysis.
I'd like to pick you up on the point of valuation though. It looks like the property I am buying will have a gross rental yield of just over 8%. Now, I thought this was a great return but I accept I need to credit check the current tenant to see how strong this is, though you seem to suggest it isn't as stellar as maybe I thought it was. It's in a residential area where property prices are quite high (South Bucks) so I'm actually surprised some crafty developer hasn't been eying it up to buy and do a change of use on it - is that not an easy thing to do for an office?
Regarding finding com parables locally, how do I do this? I'm not aware where such data is available. Do I just have to ask the estate agent and hope he's telling the truth?? Surely not..
Nothing wrong with 8% if the risk is right.
You say it is 8%, but you also mentioned that the building is only half let.
Does the 8% include the rental that you would theoretically pay to yourself for occupying the other half of the property?
Are the tenants paying the same rent you could get if you let it to a new tenant now?
How long is their lease? Do they pay outgoings? Have they got an option to get out early? How long have they been there? How long has the company been established? Is it profitable?
If they go, how easy would it be to rent out again? Lots of possible tenants or none?
What are the void costs (void rates, running costs) you would have to sub whilst looking for a new tenant?
How long has the vacant half been empty? Why hasn't it been let?
How much per square foot are you paying in capital value terms? How does that compare to house prices per square foot in the same area (which you say is residential)?
All of these things inform the risk v. return you are taking on.
If they are paying £20 per square foot, a market rent is £10 psf and they have 6 months left to go, it's a bad deal.
If they are paying £10 psf, the market rent is £12 psf and if they go bust it would take you no time at all to let it, it could be a great deal.
They reality (especially given half is vacant) is probably somewhere between the two...
Get advice!
You say it is 8%, but you also mentioned that the building is only half let.
Does the 8% include the rental that you would theoretically pay to yourself for occupying the other half of the property?
Are the tenants paying the same rent you could get if you let it to a new tenant now?
How long is their lease? Do they pay outgoings? Have they got an option to get out early? How long have they been there? How long has the company been established? Is it profitable?
If they go, how easy would it be to rent out again? Lots of possible tenants or none?
What are the void costs (void rates, running costs) you would have to sub whilst looking for a new tenant?
How long has the vacant half been empty? Why hasn't it been let?
How much per square foot are you paying in capital value terms? How does that compare to house prices per square foot in the same area (which you say is residential)?
All of these things inform the risk v. return you are taking on.
If they are paying £20 per square foot, a market rent is £10 psf and they have 6 months left to go, it's a bad deal.
If they are paying £10 psf, the market rent is £12 psf and if they go bust it would take you no time at all to let it, it could be a great deal.
They reality (especially given half is vacant) is probably somewhere between the two...
Get advice!
loafer123 said:
Nothing wrong with 8% if the risk is right.
You say it is 8%, but you also mentioned that the building is only half let.
Does the 8% include the rental that you would theoretically pay to yourself for occupying the other half of the property?
Yes. About two-thirds from the tenant and one third from my businessYou say it is 8%, but you also mentioned that the building is only half let.
Does the 8% include the rental that you would theoretically pay to yourself for occupying the other half of the property?
loafer123 said:
Are the tenants paying the same rent you could get if you let it to a new tenant now?
Apparently yes. Indeed I would say it's a fairly "full" rent they are paying with limited upside for now.loafer123 said:
How long is their lease? Do they pay outgoings? Have they got an option to get out early? How long have they been there? How long has the company been established? Is it profitable?
Lease until 2018 with annual options to break. Internal repairing lease. Been there for 2 years now. I believe it is a profitable firm albeit it's a 1 man band (in financial services)loafer123 said:
If they go, how easy would it be to rent out again? Lots of possible tenants or none?
It's in a residential area on the outskirts of London so not a prime business area but it's an area with a high level of entrepreneurship so in the same way I'm looking at having a local base, I'd say there would be others that might too. That said, I'm not yet aware there is competition from anyone else to buy it which perhaps tells me something. In summary, maybe it would not be very easy to let out if it went vacant.loafer123 said:
What are the void costs (void rates, running costs) you would have to sub whilst looking for a new tenant?
Not sure TBH. Rates I guess plus any finance costs.loafer123 said:
How long has the vacant half been empty? Why hasn't it been let?
It's not empty. It's currently owner occupied and for personal (and valid) reasons they are moving outloafer123 said:
How much per square foot are you paying in capital value terms? How does that compare to house prices per square foot in the same area (which you say is residential)?
I'm being asked to pay about £200 per sq ft. Residential in the area is about £350-400 sq ftloafer123 said:
All of these things inform the risk v. return you are taking on.
If they are paying £20 per square foot, a market rent is £10 psf and they have 6 months left to go, it's a bad deal.
If they are paying £10 psf, the market rent is £12 psf and if they go bust it would take you no time at all to let it, it could be a great deal.
They reality (especially given half is vacant) is probably somewhere between the two...
Get advice!
I'm not sure from whom I should be getting advice - you've been the best help so far TBH! I spoke to some local commercial landlords and they said they wouldn't touch it as an investment for less than 10% yield but they did concede that as an owner-occupied building the parameters are different and the yield would probably be lower. They still felt 8% was too low though.If they are paying £20 per square foot, a market rent is £10 psf and they have 6 months left to go, it's a bad deal.
If they are paying £10 psf, the market rent is £12 psf and if they go bust it would take you no time at all to let it, it could be a great deal.
They reality (especially given half is vacant) is probably somewhere between the two...
Get advice!
Based on the above information, would you tend to agree?
Something to consider, a commercial property can be held in a pension, so you set it up this way, the pension then owns the property and gets a return by renting it out to your company. Lots of tax benefits and the property is 'safe' if the company goes under.
I'm no expert so take proper advice!
I'm no expert so take proper advice!
Aquarius909 said:
Based on the above information, would you tend to agree?
Yes, as an investment, it seems overpriced. Short income, full rent, uncertain income and letting prospects.However the potential for residential conversion shouldn't be ignored. If it costs you £200 psf, costs £100 psf to convert and would be worth £400 psf done, it does underpin the value.
Equally the value to an arms length landlord is one thing, but the value to to and your business may be something else entirely.
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