Buying commercial property: Seven factors to consider

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There are a number of things that you should consider when looking to buy a commercial property. Some are the same as when you are buying a standard residential home, however, there are also a few things that you may not have considered.

1. Finance Approval
You should always make sure any agreement for sale and purchase is subject to you obtaining finance approval from your bank. Banks are often much stricter in terms of their loan to value ratio when dealing with commercial property, so it is important you talk to your bank first.

2. Building Report
You should always have a qualified builder who is experienced in inspecting commercial properties provide a written building report for you. Again, just like a residential home, it may have hidden defects that only come to light when an experienced builder checks the building.

3. LIM Report
A LIM Report is still important for a commercial building, it will not only tell you whether the building has been built in accordance with any Council consents and permits but it may also provide information regarding the further development of the property, e.g. if you are considering constructing another building on the land.

Another couple of important things to check in the LIM are:

1) the zoning of the land – to make sure that whatever commercial activity you intend to run on the land is allowed by Council; and

2) whether the building has a current Building Warrant of Fitness – this is a statement supplied by a building owner, confirming that the systems (e.g. features of a building that give ease of exit or access, escape from fire, and other safety aspects) for their building have been maintained and checked in accordance with Council requirements for the previous 12 months, and that they will continue to perform as required.

4. Insurance
You should make enquiries of your insurance broker when considering purchasing a commercial property. Premiums to cover the building itself will be significantly higher than standard house insurance, however, depending on the commercial activity you (or your tenant) is carrying out on the property, will determine what other types of insurance you might need. Examples are of course contents insurance but also public liability insurance.

5. Unit titles
If the building is a unit title, your responsibilities as building owner may be slightly different. You and the other owners of the other units form what is known as a body corporate. The body corporate will hold regular meetings to make decisions that affect the units as a whole. One of the main differences is that you will have to pay body corporate levies. These generally include amounts which go towards the maintenance of any common property, administration fees and insurance premiums. Normally unit titles are insured under a single policy held in the name of the body corporate.

There are also other issues that are specific to commercial property.

6. Tax implications
The tax laws changed in 2011 which say that as long as:

1)     both vendor and purchaser are registered for GST at the time of settlement;

2)     the purchaser intends to use the property to make taxable supplies; and

3)     the purchaser does not intend to use the property as a principal place of residence

The transaction will zero rated for the purposes of GST. That is no GST is to be paid or claimed in respect of this particular transaction.

There is no longer a requirement that it must be sold as a “going concern”.

If any of the three points above are not met, GST will be payable.

Where you have to be cautious is when one of the parties is not registered for GST. In terms of the price on the standard ADLS form of agreement for sale and purchase, there is an option to circle “plus GST if any” or “inclusive of GST if any”.

Obviously, as a vendor, you would always want to circle “plus” because if it transpires that GST was payable, you would be able to get an extra 15% from the vendor. Or if you circle “inclusive” make sure the price reflects the final amount you will receive in your hand. For example if the price is $100,000.00 Inclusive of GST and GST is payable, then you will only receive $85,000.00.

As a purchaser, you would prefer to have “inclusive of GST (if any)” as that way you can be certain in the fact that you will have to pay no more than the listed purchase price.

7. Commercial tenants - leases
When you take on a commercial property, there is often an established tenant in occupation of the property. Before committing to purchase the property, you should:

1)     review the lease itself;

2)     review any written variations to that lease;

3)     obtain confirmation from the vendor that there are no other verbal arrangements or commitments regarding the tenant;

4)     enquire about the creditworthiness of the tenant

Commercial leases can vary quite considerably from residential tenancies. One of the big differences is that generally, the landlord has no right to terminate the tenancy on notice. The tenant must breach terms of the lease before a landlord can take steps to terminate the lease.

If you do want a vacant property, however, you could attempt to negotiate a surrender. This is where the owner/landlord and the tenant mutually agree to terminate the lease. The tenant will usually ask for monetary compensation.

Summary
Commercial property is a significant investment, and it is important to invest in sound legal advice before you buy.

If you’re looking to purchase commercial property, contact commercial property lawyer, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz

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