May 20, 2019

Understanding the key considerations in buying a commercial property will assist with a successful acquisition.

Navigating the purchase of a commercial property can be difficult simply due to the amount of considerations required, such as whether the yield is appropriate compared to wider market, its location, whether the property has an existing tenancy and the leasing terms surrounding this lease.

For first time buyers, this may cause some stress and anxiety but for an experienced commercial investor these factors are simply opportunities for a better purchase.

We have summarised 5 key considerations when entering a negotiation on a commercial property to achieve more favourable purchase terms which may ultimately lead to a lower price.

1. What is the right commercial property for me?

This is the first and most important question you should ask, with the answer heavily dependent on your goals. Some properties offer significant depreciation benefits which owners can use to offset taxable income. Other properties offer strong rental returns which are purchased on the basis of cash returns. Once your investment objective is defined, the search for a property is easier and allows for a more strategic approach.

2. Historical performance

When considering a commercial asset for purchase, always undertake independent research to understand the historical performance of the asset and similar properties in the area. Assess its capital growth performance and yield, and while historical performance is not always indicative of the future, it gives a good indication of the strength of an area and asset type.

3. Leasing and Tenant

Assess and analyse any leasing documentation, confirm how the long the lease has to run and if it is, what are the chances that the property will be re-leased. Ensure you get a good understanding of the tenant and how strong their business is, make sure that they are not in arrears. Ensure any outstanding debt is accounted for in the purchase price.

4. Rents

Is the rent on the property in line with the general market rent? Its important to have a fair and reasonable rent that reflects the sector, geographical area, site, fit out. If rents aren’t in-line with market, this needs to be reflected in the purchase price.

In certain circumstances a tenant may pay a higher rent to repay a fit out funded by the Landlord, this is known as a special rent and special consideration needs to be given to the viability of the tenant to ensure they do not vacate, and a purchase price is paid over market.

5. Surprise Costs

Will there be additional costs associated with the running and maintenance of the property as a result of the previous owners or tenants. How old is the building and do you need to allow for replacement of plant and equipment? Is there any potential site contamination that may require treatment or disposal at a significant expense? Consider these potential costs and factor these into any purchase price.

These are just some things to consider before acquiring a commercial property to ensure a successful purchase.