“The commercial property market is far more complicated than the housing market,” said Nigel Grice at Drivers Jonas, the property consultancy. “If you don’t take advice, you will have problems.”
The first questions a business owner must answer before moving from the garage or study to a factory or office block are: do you need to be on the high street or near a motorway? How much can you afford to spend on rent or mortgage repayments? What size premises do you need? Should you rent or buy?
Size is simple: for an office you need about 150 sq ft per person. Location depends on the nature of the business: a shop will need to be on the high street or in a retail park, but a warehouse may be better off near a motorway or main road.
Choosing the type of property should be straightforward as long as the premises have planning consent: offices are classed B1 by planners, industrial units are B2 and warehouses are B8.
The biggest decision is whether to go for freehold or leasehold. “With low interest rates it makes sense for a small business to buy its own premises,” said Chris Mills, managing director of Friarsgate Developments, which builds offices and industrial units. “Why pay rent when you can buy? If you buy a place you are paying rent to yourself.”
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Company directors can buy their property through their pension fund to provide themselves not only with premises but also a long-term investment. However, many firms may either be unable to raise the 25% to 30% deposit demanded by lenders or be unwilling to commit such a large capital sum that could be put to better use in the business. Some may not be able to raise a loan at all.
“Banks lend money on the property but, more important, they lend on a business’s ability to pay the mortgage. We would ask to see at least three years’ accounts and look for consistent profitability,” said David Peill, of Savills Private Finance. “The interest rate varies from 1% above the base rate to 2% above. It depends how safe the loan looks.”
Once you have decided on location, budget and whether to rent or buy, you should appoint experts to find you the right property and negotiate the deal.
“Unlike the residential market, there is no central register of property, but a clearing house for agents,” said Grice. “Having found a property, the agent explains the pros and cons of the deal and negotiates the terms. For this service you will pay a fee of 1% of the purchase price or 10% of the annual rent.”
If the market is in the doldrums, prospective tenants can negotiate rent-free periods or even cash back. “We recently secured a 25-year lease — which is very long — at market rent for a client in the West End,” said Grice. “In return, our client was given a rent-free period of five years. Imagine what that does to a company’s bottom line.”
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However, in a busy market, the landlord will have the whip hand. “Landlords demand the most they can. They will ask for a year’s rent as a deposit and give no rent-free period. Also, your company’s financial strength may have an impact: a man of straw can expect to pay more rent than, say, BP.”
The length of lease will also determine the rent. On the whole, the longer the lease the lower the rent. Commercial tenants also have a lot of different obligations, but a good agent or lawyer will weed out the most onerous clauses.
“When you take on a lease you become responsible for the condition of the property as a whole,” said Grice. “If it has dry rot, whether you knew about it or not, you are responsible for getting rid of it. A lot of people get into difficulty because they don’t have a survey done.”
Some landlords try to make tenants responsible for implementing new legislation. The bill for complying with the Disability Discrimination Act and asbestos regulations, for example, could run into thousands.
Rents are reviewed, usually upwards, every three to five years and, though the formula for increases should be set out in the lease, reviews often lead to disputes that drag on for years.
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As well as consulting an agent, companies should also approach the local council, which will not only have property available to let, but may also offer cheap deals or rent-free periods to attract business.
Under a scheme called Creative Plymouth, for example, the city council is building studios and work spaces and leasing them to graduates of the university’s arts and media courses. “We want to encourage creative graduates to stay and thrive in Plymouth,” said a spokesman.
Kitted up on the factory floor
WHEN graphic designer Paul Shenton, couldn’t find any furniture to fit in his tiny flat, he decided to make his own. ‘I got an electric saw and some MDF board and started creating things,’ said Paul.
Two years ago he gave up his job building websites to set up his own company, Slot Furniture. The self-assembly chairs, tables and sofas fit together without screws or glue. ‘I started building it in the shed, but quickly realised I needed to find a factory,’ he said. ‘My wood supplier told me about a place in Slough, Berkshire.
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‘We pay £1,000 a month for the 3,000 sq ft factory. It’s on an industrial estate that is being sold, so the lease is very short, but because the land is contaminated — it’s on the site of an old starch factory — the sale is going very slowly. We may have to move out next February, so I will start looking for a new place in September.’