Commercial purchase to lease to our Business

Hi Guys,

My Partner is starting up a private practice and we are considering purchasing a office and then leasing this to our business. Just wanting to know from everyone what their thoughts on this are and what we should be considering here?

Any advise on this would be greatly appreciated.

Chris & Annette

 

Ownership and structure are important. More for asset protection but also for future choices and changes.

Could you consider a SMSF and it owns it and you pay rent to the fund ? SMSFs can be a great asset protection vehicle BUT equity cant be accessed etc. A SMSF can even borrow (low LVRs for business I will caution ie under 70% and some SMSF lenders can be picky on locations)
If it is a SMSF you will need to be familiar with all the rules eg : paying rent !, regular rent reviews, improvement issues etc.

GST may be a issue when buying commercial and what seems trivial may need some advice on alternatives. ie Do you register for GST or not ? Cost may include GST...How do you fund that ? Can you claim it ? Can you acquire under going concern ? (Unlikely)

Liquidity in some commercial property can be difficult. Do homework and find who the reliable commercial agents are in that area. Find out where the hot spots are and which are the dead dogs. In any street there will be "problem" buildings and also shining stars.

 

Main things to consider are asset protection and tax. Other things are estate planning for succession, related party loans, accessing equity, growth prospects, rent v purchase price, tying up equity, serviceability, opportunity cost etc, land tax. etc.

A SMSF is an excellent idea as you may claim a 45% deduction with the fund paying just 15% tax on the rent. But as Paul says not able to tap into the equity.

An alternative is a company or a trust. This will allow the business company to not own the valuable property so if the business goes down the property will be safe. This is the same with a SMSF but with a non SMSF owner you will be able to tap into the equity and use this to purchase further properties - subject to serviceability.

 

Hi there Macc,

This is a common question and strategy for small businesses. I personally own an office in a SMSF and have no regrets at all. Awesome strategy used for many small business owners.

So lets run through the steps involved in general terms (this is not financial advice) - this is how it works for me and many of my clients:
1. Seek advice on the set up of SMSF and borrowing strategy
2. Set up an SMSF with a corporate trustee
3. Depending on finance - if from a third party obtain a pre-approval to determine your borrowing power and purchase price
4. Set up a custody bare trust for the borrowing
5. Organise a contract of sale for the purchase of property (seek advice on the purchaser name) - subject to finance and building inspection. Note - if subject to lease no GST on purchase (preferred)
6. Pay a deposit from the SMSF
7. Depending if new/ not, you may need to consider the state of the building before finance clause is expired
8. Engage a solicitor who knows about SMSF
9. Settle the property and ensure you are registered for GST
10. Organise fixtures and fittings - i.e is the premise fitted?
11. Organise a lease agreement between the owner (SMSF) and your company. This should be carefully constructed with explanation of who is responsible for outgoings etc, lease term, monthly rent (needs to be commercial)
12. Finance: either a 3rd party loan (i.e bank) or related party loan. If you use a Related party loan seek advice, interest needs to be commercial interest rate and appropriately documented. Also, needs to be paid at arms length....i.e monthly.
13. GST paid on sale of property (if applicable) can be claimed back on BAS. Generally choose quarterley
14. Take a deep breath. For me, and many this happens quickly and may involve the fit out of an office (don't get ripped off doing this - if you know builders just get some quotes to do it yourself).

This is just the strategy to purchase - added to this are the effective contribution strategies for small buiness, i.e contribute $30k concessional from the business to the fund (per member), so if your partner is a director of the trading company and the fund - you can contribute for them too.

As mentioned above, corporate trustees can be used for effective asset protection.

This is not a complete list but a number of steps that detail the advantages of purchasing business real property in a SMSF.

I hope this helps you along on your journey

Cheers Ivan

 

Thanks for all the great advice guys, really appreciate your help.

I did not realise the difference would be so large in lending criteria for commercial vs residential property.

Chris

 

ALSO

Make sure that your chosen purchase is going to be suitable for the business for the medium to long term. The office market can be pretty ordinary at present and I wouldn't want to be outgrowing it in 5 years and then needing to flog it off. Can you afford to buy larger premises and then try and sublet part of it to help offset the costs? Again vacancy rates can be ordinary in lots of areas.

Saying that it can be a great strategy, you just want to make sure that being the owner of the property (though any structure) does not restrict your business in negative ways.

 

Some good advice in this thread from OP's. I'll just look at another angle on this.....you say you are just about to start this private practice. Therefore you actually have two significant risks to deal with : 1) The risk of acquiring the most appropriate premises, and 2) The risk that goes with starting a new business from scratch.
How confident are you that the business will actually take off like you hope, and that you know in advance your true needs for future staffing and office space / parking requirements ?
There could be some some merit in being boring and renting premises for the first year or two until the business issues sort itself out, and THEN going hunting for the freehold. My 2 cents.

 

Nice personal financial advice and legal advice. AFSL? You a solicitor ?

 

Good try Paul, now head back to your corner and offer your discounts.

You know who I am, as most do. Every post offers 'advice', disclaimers on each.....or good spirit and share knowledge which is the spirit of this forum.

Have a great day.

Cheers, Ivan

 

Financial advice on either of the two levels requires a AFSL not a credit license or accountants exemption. Contribution advice on either level is certainly financial advice

 

You have been given some sage advise so I will not rehash it.

I can add that should also look at properties that are for lease with an option to purchase. I have been contracted by Medico's who are just starting their practises and this is often a great solution for them.

You get your feet wet whilst you work out how the business will track in a few years.