Buying The Office

[SDarks]

I have rented our current office for the last 5 years, great location and we are very happy here + lots of room for staff expansion. There are 3 offices in the block and all three tenants inc me have just renewed leases for at least 5 years. The block has also just had the roof replaced and all windows replaced.

The landlord has offered to sell me the block for a multiple of 10 times the combined annual rents. He made a comment about it being a good pension asset but didn't explain.

I don't have the cash to purchase outright personally so would have to mortgage, not sure how that works as I've only ever had residential mortgages. The business could purchase outright but not sure it's the best use of company funds.

Any experts out there who know the ins and outs of this any advice would be appreciated.

Edited by SDarks on Monday 13th March 12:35

[Muzzer79]

What business are you in?

Do you want to be a landlord aswell as whatever business you are in? Will being a landlord distract you or your staff from your business?

What is the difference between the rent that you pay now and your theoretical mortgage (divided by 3 units)

You have potential for growth, but what if you want to downsize? Or remove the office altogether?

If you are considering this, I recommend speaking to a proper industrial property agent.

[Deesee]

SDarks said:

I have rented our current office for the last 5 years, great location and we are very happy here + lots of room for staff expansion. There are 3 offices in the block and all three tenants inc me have just renewed leases for at least 5 years. The block has also just had the roof replaced and all windows replaced.

The landlord has offered to sell me the block for a multiple of 10 times the combined annual rents. He made a comment about it being a good pension asset but didn't explain.

I don't have the cash to purchase outright personaly so would have to mortgage, not sure how that works as I've only ever had residential mortgages. The business could purchase outright but not sure it's the best use of company funds.

Any experts out there who know the ins and outs of this any advice would be appreciated.

8% yield is about right for purchase for south east, so 10x not far out.... depends if they are market rents..

Options in a nut shell.. (as to not send the thread on a tangent).

Company buys, saves rents and collects rent from other tenants, cash outright or balance of loan/mortgage & cash.

You buy (personally/SPV co), company and other tenants rent from you..

If you have SASS/SIPP funds the SASS/SIPP can purchase, (& you can also potentially borrow within this)..

1st port of call, your company/personal accountant, prop co, owner occupier, SIPP/SASS will all have different combinations of company and personal tax advantages/disadvantages.

Good luck and if you need debt assistance / tailored bespoke guidance please feel free to get in contact

[Tebbers]

Bear in mind that commercial property values are predicted to tank in the next few years in many areas so be wary of your landlord trying to dump it on you.

[M1AGM]

SDarks said:

I have rented our current office for the last 5 years, great location and we are very happy here + lots of room for staff expansion. There are 3 offices in the block and all three tenants inc me have just renewed leases for at least 5 years. The block has also just had the roof replaced and all windows replaced.

The landlord has offered to sell me the block for a multiple of 10 times the combined annual rents. He made a comment about it being a good pension asset but didn't explain.

I don't have the cash to purchase outright personally so would have to mortgage, not sure how that works as I've only ever had residential mortgages. The business could purchase outright but not sure it's the best use of company funds.

Any experts out there who know the ins and outs of this any advice would be appreciated.

Edited by SDarks on Monday 13th March 12:35

Commercial mortgage will require a hefty deposit, your bank manager should be able to advise.

Alternatively you could buy it with a pension fund (SIP or SASS). The rules are you can only borrow up to 50% of the pension fund value iirc. So this may or may not be an option (company could pay money free of CT into pension to do this for you). If you have other private pension pots you could put them together to do this?

Either way if you are staying long term its not a bad option to buy. Although the capital value will go up and down your rents will be paying off the building over time.

We did this back in 2004. Bought an office block using an LLP entity with a commercial mortgage, I think with 25% deposit. Rented it to the business we own. Paid off the mortgage in less than 6 years iirc. Then sold it to our SIP which now rents it to the business. It was paid off again very quickly so now we have the money going into the pension fund and a cash lump sum from the sale/transfer to the SIP. The value of the building has gone up and down and we are probably not far off where we started tbh, but the asset is free of debt and the income is good for retirement, assuming the business continues to thrive. We would have gone ahead with another property in a similar format but covid lockdown started 5 days before completion so we bailed out due to the uncertainty.

Any half decent IFA would be able to advise on the detail.

[vulture1]

Personally I think every business should aim eventually to own their buildings unless the rent is such a tiny percentage of the yearly costs.
Obviously on start up you can't do this.

[Smokey Bear]

Maybe I'm naive but if the rent covers the mortgage, insurance and any associated taxes on income with a small margin left for a fund for repairs then doesn't it make sense to buy the building even if you don't see a profit every month you will own a building which can be later sold for a lump sum that the tenants have effectively paid for.

I'm not a landlord or anything but if there is a lease in place for the duration or most of the payback period then surely its a fairly good move to make.

[Mr Pointy]

I've known a couple of business owners who had the chance to buy the properties they were renting & they were very keen to do so, eventually ending up with the business paying rent for the property held in a personal pension. I know IM (sponsors over on the Finance boards) have people who handle commercial property inside SIPPs but for a start If you just want to understand more about the possibilities then you can contack Nick at IM & he will be happy to talk to you. There's no obligation, it's something they offer any PH member. At the very least you'll come out with a bit more understanding.

[e-mail]
https://www.pistonheads.com/gassing/topic.asp?h=0&...

[SDarks]

Thanks for all the replies I'm leaning toward the personal purchase if feasable but need to do some DD and speak to the professionals.

Will start a thread if I do eventually become a commercial landlord.

SD.

[Mr Pointy]

SDarks said:

Thanks for all the replies I'm leaning toward the personal purchase if feasable but need to do some DD and speak to the professionals.

Will start a thread if I do eventually become a commercial landlord.

Are you the only one of the three tenants who the landlord has made the offer to? You might end up in a race to buy.

[soxboy]

Tebbers said:

Bear in mind that commercial property values are predicted to tank in the next few years in many areas so be wary of your landlord trying to dump it on you.

Says who?

[qska]

soxboy said:

Says who?

Remote work

[Chrisgr31]

qska said:

soxboy said:

Says who?

Remote work

It all depends on what business you are in, and who your employer is and whether they are happy with remote working. I suspect there will remain a strong market for smaller properties where the building is likely to be owned by the business/business owner.

The large offices may struggle but even with those there is evidence that they are being adjusted to allow for more flexible working with fewer fixed desks.

Obviously remote working will remain but I suspect its going to be very dependent on the individual.

[ooid]

What you are simply asking is " Lease or Buy" decision, and one of the things that I do for a living, like many in the RE Investment/Finance.

In short, you would need loads of info about your business(accounts), tax, and finally your business strategy for the next few years ahead to make the final call. We would create two cash flow models and compare the performance metrics (IRR) to make the recommendation.

Good luck!

[surveyor]

Lots of people saying by it as a SIPP. Bear in mind that if you do it is managed independently as an asset.

A scenario I came across was an owner who had outgrown the premises. They had new premises identified and wanted to surrender the lease on their SIPP-owned property. The independent report said that the property was overrented as values had fallen. They had to pay a decent surrender premium into the SIPP. At least they will eventually see the benefit - but it was not exactly ideal timing for them.

[lizardbrain]

Can I ask what are tax consequences of buying an office with company cash?

Let’s say a a Ltd with annual profit of 100k and buys an office in cash for 200k. Does it wipe out corp tax for two years? I’m guessing not?

[Sy1441]

lizardbrain said:

Can I ask what are tax consequences of buying an office with company cash?

Let’s say a a Ltd with annual profit of 100k and buys an office in cash for 200k. Does it wipe out corp tax for two years? I’m guessing not?

Yep, it would net off the profit meaning £0 CT for those 2 tax years.

[MustangGT]

Sy1441 said:

lizardbrain said:

Can I ask what are tax consequences of buying an office with company cash?

Let’s say a a Ltd with annual profit of 100k and buys an office in cash for 200k. Does it wipe out corp tax for two years? I’m guessing not?

Yep, it would net off the profit meaning £0 CT for those 2 tax years.

Surely it is a capital purchase and treated as an asset in the books?

[lizardbrain]

MustangGT said:

Surely it is a capital purchase and treated as an asset in the books?

If this is the answer what does this mean for tax?

[MustangGT]

Treated the same as any other fixed asset. Capitalised and depreciated as Land and Buildings. IIRC land has zero depreciation and buildings attract 2%. The asset will also need 'revaluation' every now and again with the increase in value going into the revaluation reserve on the Balance Sheet. Purchase of fixed assets has no bearing on profit and loss account.