Buying an office for the company - what should I consider?

[Aquarius909]

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.

[Aquarius909]

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.

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..

[Aquarius909]

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 business

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 out

loafer123 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 ft

loafer123 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.

Based on the above information, would you tend to agree?