With low interest rates, there’s never been a better time to consider buying rather than renting your premises.
By Ryan Painter
Buying a commercial property can be time-consuming and complex but it can also be hugely rewarding – both financially and through the security of knowing you own the building from where you operate your practice.
Once you decide to buy your premises there are many considerations regarding finance. Being aware of the options and solutions available will enable you to arrange the best structure for your needs.
There are many reasons why a public practitioner may want to own their practice premises, including:
- a desire to secure a long-term passive annuity income in retirement
- potential future capital growth
- security of tenure
- a lack of property in your desired location
When deciding whether to enter into premises ownership, give the following factors serious thought.
Structure: SMSF or unit trust?
If you purchase in a self-managed superannuation fund (SMSF), for example, you would not be able to add or remove investors easily. Banks have greater limitations on loan-to-value ratios (LVRs) and are reluctant to allow multiple SMSFs to invest in a single title. SMSF rules also restrict your ability to make significant improvements to the property. A unit trust or company structure, on the other hand, can facilitate the transfer of ownership and allow SMSFs to hold units or shares alongside other investors without affecting the banking terms.
Long-term suitability: what if the practice outgrows the premises?
Knowing the approximate time for which the practice will occupy a premises and putting an “outgrowth plan” in place in advance, will allow you to structure your finance in a way that if or when the practice moves, the financial status of the investment is sound. For example, the LVR is within commercial terms, making refinancing easier while being less reliant on a strong tenant.
Who participates in the investment?
It’s important to consider who will have access to the investment – third parties, existing partners, future partners and or key staff. Allowing the firm’s current and future partners to co-invest will certainly align the practice with the interests of the property owners. However, excluding some partners from the investment could result in the loss of a tenant when you need them the most.
Where will the deposit come from?
Often the biggest impediment to buying your own premises is a perception that you need to contribute a significant deposit, usually 30-40 per cent. If deposit funds are being drawn from the business this could affect future loans and or cash flow. It may not be the best time to liquidate certain assets.
It is worth knowing that there are specialist lenders willing to offer accountants significantly higher LVRs, sometimes as high as 100 per cent, and up to 90 per cent for SMSF borrowing for owner-occupied practice premises. This could mean that partners of a firm who have less capital available are able to co-invest with an equal (smaller) equity contribution. This may also open up opportunities to refinance existing properties, allowing new investors in and releasing equity to the original owners. The released funds could be used to grow the practice or repay other debt.
CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.
Finance conditions to look out for:
- any additional security you are required to provide may affect your ability to use the associated equity to grow your business or make other investments
- the covenants and conditions associated with your loan, for example, an annual review clause that stipulates a certain value of the property, or another financial metric associated with the practice
- the cost of the review, if it requires a property valuation, and the consequences of a breach.
Though the best way to structure commercial property finance will vary for each public practice, all should consider the numbers. Interest rates are at record lows and money has never been cheaper. A 90 per cent LVR loan could mean that you are paying less than 7 per cent yield, even with some loan amortisation. If you are currently paying a higher rental yield, then buying may be beneficial.
However, like bonds, commercial property prices are inversely correlated to interest rates, and a rising interest rate environment may mean that you have to hold your investment property for a lot longer to realise any capital growth.
Ryan Painter is an accounting finance specialist with BOQ Specialist, which provides banking services to niche markets. Visit www.boqspecialist.com.au/accountants
Read more: Certain sectors of the property market are thriving and canny investors are taking advantage