Buying vs renting premises
One of the most important decisions to make when getting a new small business up and running is whether to rent or buy a commercial property. finweek spoke to a commercial real estate agent about the pros and cons of each.
whether you are buying a house or a commercial property, South African banks generally require a deposit, which makes buying property a capital-intensive exercise. When buying a commercial property, a business will see a large drain on its monthly cash flow when servicing a bond and paying for the operational costs associated with owning a property, says Elton Holland, director of the Ikon Property Group, which specialises in commercial real estate.
“There is also generally at least a 30% equity requirement that a small business would have to take out of operating cash flow to fund the purchase of the property,” he says. Another important consideration is whether the purchased property would cater for future expansion of the business, according to Holland. “If not, then renting might be a better option for the short term,” he says. “The [upside] of ownership is the ability to build the business’ net asset wealth whilst utilising the business to pay off the bond.”
If an entrepreneur decides to buy a business property, they would be able to claim back the VAT charged. Banks, however, generally require that the business be in operation for at least three years, with three years’ financial statements on-hand and up-todate management accounts, explains Holland.
WHAT TO ASK WHEN CONSIDERING BUYING: Is there good tenant demand in the area? Is there rental growth in the area? If the business fails, is the property easily re-lettable? Is the price market related? Will the property see future growth; will the business grow as a result of the property? Often premises are purchased for strategic purposes – this may be a shop in a good retail location or a warehouse situated close to a large client.
What condition is the property in? A purchasing decision should be made based on the condition of the property; if it’s in poor condition, remedial costs should be factored in.
WHAT TO LOOK OUT FOR IN A RENTAL AGREEMENT:
Deposit: Is the required upfront deposit reasonable and proportionate to the monthly rental?
Escalation: Negotiate the escalation of the rent after 12 months. Don’t blindly accept an 8% or 10% increase every year.
Fittings and fixtures: Ensure that the contract stipulates which fixed fittings, brought on by the lessee, can be removed from the building once the rental agreement lapses. If this isn’t stipulated, they become part of the building.
Insurance: In almost all circumstances, the lessor is responsible for insuring the structure of the premises at replacement cost while the lessee is responsible for insuring the content and equipment inside the building.
Use of property: Ensure that you understand the limits placed on the use of the property and stick to them.