If I had a pound for every time I’ve heard this phrase, I’d be a very wealthy man: “Paying rent is money down the drain – I want to buy a building to put my business in”. Many a business owner has crossed my path determined to purchase a commercial premises for their business rather than lease one. Whilst on paper this might seem like a better option longer term, of course, it isn’t quite as simple as that. For one, you may very well never actually ‘own’ the building. There are several ways to structure this “purchase” and the differences are about tax efficiency and finance. You may control the property but never be the legal owner. Curious? This blog will raise some questions in your mind and help you answer them.
1 What do you really want?
The first question to consider is why you really want to own your premises. Is it about the business or about you? It’s important here, to separate your own wants and needs (investment aspirations) from what your business needs. The reality is that whether you own or lease, there’s very likely to be no difference for your business – it will pay rent to a landlord. This might be the business owner’s pension fund or another entity. Notionally then, you become both the tenant and the landlord. Then, when things change (as they tend to) it gets complicated! You could end up with competing priorities i.e. the financial health of your pension vs the financial health of your business.
2 What happens if/when your business shrinks or outgrows the space?
If you decide that your business needs to move, how will you manage that process and find an alternative tenant? You could end up with competing priorities i.e. the financial health of your pension vs the financial health of your business. How will you decide which is a priority and make the right call?
3 How long will all this take?
Many business owners expect a commercial property transaction to take a similar amount of time to a residential one. In reality, it can take 3 – 5 years of financial planning and time to get everything set up, especially where a pension fund and bank borrowing is concerned. So be prepared for a lot of documentation and ensure you have all the good people you need, on your team beforehand! Also, have a sound interim location for your business to trade from, so it isn’t being held back while you undertake this important structural change.
4 Are you prepared to still not ‘own’ your premises?
If you are using your business as a tax-efficient, personal investment, then the pension fund will own the building. Whilst this is very tax efficient, you don’t own the building – the pension trustees do. Your business still pays rent, but to the pension, with you as the beneficiary.
5 What happens when company directors retire?
If you own a building and you’re the director of your business, things are pretty straightforward. if the directors of the company are also the joint owners of the building, also, happy days.
But what happens when a group of company directors, who each own a share of the building (possibly within their pension pot), retire? The directors of the original business and the directors who own the building, will eventually become two completely different sets of people with completely different expectations and motivations from when the whole scenario was set up. This is why taking a long-term view of ownership is key – don’t just think in terms of 10 years, but 25, or even 50! This happened to a client of mine – the directors of the holding company actually decided to sell the building and for complicated reasons the business has had to move out! If this has raised more questions for you to think about and you’d like a handrail through the whole process, I am here to help. I’ve been that handrail on many occasions and although each time it is a unique set of circumstances, the principles remain the same.
As always, if you need support making the right commercial property decisions for your business, then let’s have a chat and discuss your options. Click here to book a call https://calendly.com/talk-to-jim/30min
