Buying a commercial property is a bit more complicated than buying a house. There are extra things to consider as a consequence of the complexity of the purchase process and ongoing ownership of the property.
Whether you are buying a commercial property as an investment or as premises from which to operate your own business, you must ensure that it makes economic sense.
Analyse the return which you will receive and/or the costs which you will incur as owner. Obviously, it is important to understand that commercial parameters will change over time, such as market rent, the amount of land tax payable and interest rates.
You may wish to seek accounting advice to perform a feasibility analysis of your purchase or ongoing ownership.
Obviously, your commercial return will depend on the legal issues affecting the property. For example, the terms of any lease affecting the property. Similarly, planning schemes and planning permits may affect the property. It is important to understand these issues, because there is usually no cooling off period for commercial or industrial properties.
Special conditions in the contract should be negotiated
The contract for a commercial property is generally unique to the property and is usually negotiated between the parties.
We would always recommend that the contract of sale is carefully reviewed by a lawyer to ensure that it matches your understanding of the transaction.
In addition, it is usual that special conditions are added to the contract by you, or at the very least, you request amendments to the vendor’s special conditions. Matters which are likely to be addressed specifically in this way relate to:
- whether you have a period in which to conduct a due diligence allowing to terminate if you are not satisfied with the property;
- transfers of registers held by the vendor, such as maintenance or asbestos registers;
- matters relating to the lease of the property, including the transfer of any security bonds or bank guarantees held by the vendor/outgoing landlord. You should also address how to account for unpaid rent and in the case of a Retail Lease ensure past compliance with the Retail Leases Act and that you receive all information required to calculate a reconciliation of actual and estimated outgoings at the end of the year;
- whether you may require Foreign Investment Review Board (FIRB) approval; and
- any other provisions which you may require, such as a planning permit to carry on a specific use at the property or perhaps to carry out a particular development of the property.
Have the property carefully inspected
In addition to the usual investigations that all property purchasers should conduct regarding the structural soundness of the building, you should consider maintenance obligations and the likely cost of those obligations, fire safety requirements and ongoing maintenance and inspection, asbestos and other chemical contamination, potentially including contaminated ground water and other sub-surface issues. It can be a very good idea to engage a building inspector to conduct a full review of the standard of all fixtures and fittings in the property, their age, expected life cycle and past maintenance and replacement programs.
What ownership structure should you use
You should obtain advice from your accountant and solicitor on the appropriate entity to own the property. Different structures result in different tax outcomes and can result in different liability issues or protections depending on the circumstances of your purchase, your intended use of the commercial property and your predicted future circumstances.
GST and other costs
As a purchaser of commercial property there are additional costs which you should take into account. Some of these will relate to the engagement of various experts and consultants to help you make decisions and conduct your due diligence into the property.
As you would expect, the usual costs of purchasing property, such as registration fees and stamp duty, will add to the cost of purchasing a commercial property.
Further, careful consideration should be given to the GST which will ordinarily be payable on the purchase of commercial property at the time of settlement. In some circumstances a going concern exemption may be applicable and you may need to consider not just the likely GST imposed on your purchase but also on your ongoing leasing of the property and sometimes even how you intend to dispose of the property in the future.
Septimus Jones & Lee is experienced in acting on commercial property purchases and sales. If you are considering buying a commercial property, contact Septimus Jones & Lee before you sign any purchase contract. This article has been written by Partner, Gareth Jones and is intended for general information only.