Help - Mixed use building purchase
Discussion
Hi All,
I have a small BTL portfolio and want to diversify...... a mixed use building has come up.
Essentially a shop, with a flat above.
The shop is empty and the flat is tenanted.
So what are the watch outs? Am I liable for business rate until the shop is tenanted? What else should I consider? How will insurance work?
How different from a BTL house is this venture?
Help really appreciated.
IceBoy
I have a small BTL portfolio and want to diversify...... a mixed use building has come up.
Essentially a shop, with a flat above.
The shop is empty and the flat is tenanted.
So what are the watch outs? Am I liable for business rate until the shop is tenanted? What else should I consider? How will insurance work?
How different from a BTL house is this venture?
Help really appreciated.
IceBoy
Check the voa website and see if the flat comes up:
https://www.gov.uk/correct-your-business-rates
What's the use class of the shop? If it's a hot food takeaway or suchlike, sometimes (well, not sometimes, all the time) mortgages can be a real problem on the residential above.
That might not be a problem now of course (you'll be renting it I guess?) but if you decide to sell it separately just be aware that it might affect the value (as it'll be cash purchasers only as buyers).
Also - check the usage anyway as sometimes you can get permitted development rights to convert the commercial element into resi (altho majority of boroughs are doing their level best to bang that and depending on where the property is might not be possible anyway - for too many reasons to go into here).
https://www.gov.uk/correct-your-business-rates
What's the use class of the shop? If it's a hot food takeaway or suchlike, sometimes (well, not sometimes, all the time) mortgages can be a real problem on the residential above.
That might not be a problem now of course (you'll be renting it I guess?) but if you decide to sell it separately just be aware that it might affect the value (as it'll be cash purchasers only as buyers).
Also - check the usage anyway as sometimes you can get permitted development rights to convert the commercial element into resi (altho majority of boroughs are doing their level best to bang that and depending on where the property is might not be possible anyway - for too many reasons to go into here).
As to question 1 I think it'll come down to whether the properties (the shop and the flat) are held in a single Land registry title or two separate ones. If two then vat will apply to the shop and not to the residential I imagine. But again, best check of course.
If a single title then vat, I think, will apply to the entire property. You wont be able to sell the flat separately on that basis. You'll have to create two leaseholds within the freehold (one for the shop downstairs, the other for the flat). And I'm fairly sure there might be another stamp duty trigger when you do so. You'll need to take professional advice of course on that etc etc.
If a single title then vat, I think, will apply to the entire property. You wont be able to sell the flat separately on that basis. You'll have to create two leaseholds within the freehold (one for the shop downstairs, the other for the flat). And I'm fairly sure there might be another stamp duty trigger when you do so. You'll need to take professional advice of course on that etc etc.
OK, so a couple more questions, now that I have visited a couple of properties:
1. Most are on one title shop below and flat above, will this be OK to get mortgage and how does tax relief work on this type of property?
2.The shops are usually on a lease with approx. 5-10 years remaining, who is responsible for the up keep of the property? and fix things when they go wrong...electrics, plumbing, heating etc?
3. I guess I would be responsible for the external building up-keep and insurance?
4. What happens if the business fails and they bail?
I have a lot more research to do and will have more questions over the coming weeks.
I'm very comfortable with residential BTL, this is my first step in to mixed use.
Thanks in advance.
IceBoy
1. Most are on one title shop below and flat above, will this be OK to get mortgage and how does tax relief work on this type of property?
2.The shops are usually on a lease with approx. 5-10 years remaining, who is responsible for the up keep of the property? and fix things when they go wrong...electrics, plumbing, heating etc?
3. I guess I would be responsible for the external building up-keep and insurance?
4. What happens if the business fails and they bail?
I have a lot more research to do and will have more questions over the coming weeks.
I'm very comfortable with residential BTL, this is my first step in to mixed use.
Thanks in advance.
IceBoy
1. Tax relief not sure. You will be able to get a mortgage, but probably have to be a commercial product with higher deposits.
2. All depends on the Lease. Some will be internal repairing and you will be responsible for external maintenance. Some you will be able to recover some if not all of the external costs. Would be unusual if the internals including electrics, plumbing and heating are not tenants responsibility.
3. Probs. Might be able to recharge insurance depending on Lease terms.
4. Possession easier to get than resi. However you would end up with no dilaps, rates, cost of re-letting etc.
2. All depends on the Lease. Some will be internal repairing and you will be responsible for external maintenance. Some you will be able to recover some if not all of the external costs. Would be unusual if the internals including electrics, plumbing and heating are not tenants responsibility.
3. Probs. Might be able to recharge insurance depending on Lease terms.
4. Possession easier to get than resi. However you would end up with no dilaps, rates, cost of re-letting etc.
In terms of your point 4 - you must check that the rent being charged (within the current lease) hasn't been pushed too much. If it's wrack-rented (ie, the rent is well over what could ever be achieved if that property was put back on the market to let) - your tenant is on borrowed time before they can't afford the rent. The valuation the vendor places on the property (and what you're paying, and getting a mortgage on) is too high too. Potentially. Needs investigation is all I'm saying.
Persuading a vendor, however, that their valuation is too high, is er, tough and not always going to happen. You'll often have to take a view of course.
If the tenant goes bust, read what Surveyor has written - he's right.
So have a look at what other shops around you/comparable shops nearby are on the market (to let) for? Sometimes rightmove's commercial tab can help (but can be a mixed-back if I'm honest. Far better to find out local commercial agents and go and visit them. don't call - go visit - you'll get better quality face to face. in my humble opinion.
Plus they might have opportunities that aren't advertised. You never know.
Persuading a vendor, however, that their valuation is too high, is er, tough and not always going to happen. You'll often have to take a view of course.
If the tenant goes bust, read what Surveyor has written - he's right.
So have a look at what other shops around you/comparable shops nearby are on the market (to let) for? Sometimes rightmove's commercial tab can help (but can be a mixed-back if I'm honest. Far better to find out local commercial agents and go and visit them. don't call - go visit - you'll get better quality face to face. in my humble opinion.
Plus they might have opportunities that aren't advertised. You never know.
A few other points.
If the shop has a tenant, there will need to be some appropriate accounting to hand off the tenant to you. Make you understand what is happening with the deposit - who has it, etc.
Commercial leases can say more or less anything. You must read them. And you must understand what has / has not been done. As landlord you will inherit all the ups and downs, including things said or done or not done by the previous owner that can still be binding on you.
You will probably want to start a crash course in managing commercial property. Or you could find a local agent who will manage the property for you, for a fee of course. There are a lot of potential pitfalls with being a commercial landlord, just as there are a lot of potential pitfalls in being a commercial tenant.
If the shop has a tenant, there will need to be some appropriate accounting to hand off the tenant to you. Make you understand what is happening with the deposit - who has it, etc.
Commercial leases can say more or less anything. You must read them. And you must understand what has / has not been done. As landlord you will inherit all the ups and downs, including things said or done or not done by the previous owner that can still be binding on you.
You will probably want to start a crash course in managing commercial property. Or you could find a local agent who will manage the property for you, for a fee of course. There are a lot of potential pitfalls with being a commercial landlord, just as there are a lot of potential pitfalls in being a commercial tenant.
One other point. You mentioned business rates when empty. I hope you don't have the problem, but in case you do...
Many smaller business premises are now in effect exempt from business rates. Start with the rateable value (from the VOA website), and then use that to do an online estimate of rates payable.
If the property is empty, there is a 3-month period during which rates are not payable. If the shop is already empty when you buy it, the chances are that that period is already ticking / has run out. Ask the local council - they will tell you.
You can "re-set" that clock by having the building occupied (actually occupied, and paying business rates) for a minimum of 42 days. That will be sufficient to trigger a new 3-month period. But you must do this correctly otherwise the council can - and often will - challenge the arrangement as tax evasion. There are companies who can manage this for you.
Alternatively, if the property is occupied (legitimately) by a charity then the charity can claim a mandatory discount of 80% of the business rates. If you're expecting a void period, you can sometimes line up a charity to use the space, pay them a proportion of the business rates, have them pay their 20% and use the rest to support their charitable works.
This is actually something I can help you with, but I hope you never need it (we've got charitable programmes operating in several properties around the UK, from small shops to a 20k square feet warehouse).
One final note on business rates - have a look at the VOA website and compare the business rates valuation to others in the area. Does it look reasonable? Does it even match the property you're looking at? Often strange rates valuations can make a big difference to the ease with which you can find tenants, because the numbers can get pretty high pretty quickly for larger units.
Many smaller business premises are now in effect exempt from business rates. Start with the rateable value (from the VOA website), and then use that to do an online estimate of rates payable.
If the property is empty, there is a 3-month period during which rates are not payable. If the shop is already empty when you buy it, the chances are that that period is already ticking / has run out. Ask the local council - they will tell you.
You can "re-set" that clock by having the building occupied (actually occupied, and paying business rates) for a minimum of 42 days. That will be sufficient to trigger a new 3-month period. But you must do this correctly otherwise the council can - and often will - challenge the arrangement as tax evasion. There are companies who can manage this for you.
Alternatively, if the property is occupied (legitimately) by a charity then the charity can claim a mandatory discount of 80% of the business rates. If you're expecting a void period, you can sometimes line up a charity to use the space, pay them a proportion of the business rates, have them pay their 20% and use the rest to support their charitable works.
This is actually something I can help you with, but I hope you never need it (we've got charitable programmes operating in several properties around the UK, from small shops to a 20k square feet warehouse).
One final note on business rates - have a look at the VOA website and compare the business rates valuation to others in the area. Does it look reasonable? Does it even match the property you're looking at? Often strange rates valuations can make a big difference to the ease with which you can find tenants, because the numbers can get pretty high pretty quickly for larger units.
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