Thinking about jumping into the commercial property game? There are a few things you need to take into consideration before you do. Unlike residential property investment, commercial property ownership is high stakes with some significant potential risks you need to watch out for.
The purchase jargon alone will leave your head spinning, making the already tricky terms of ownership and special conditions difficult to wrap your head around. You need to understand every word of it, because getting it wrong can cause serious financial hardship or legal hassles that keep you from focusing on your business or getting ahead.
If you are considering purchasing industrial land, commercial or industrial buildings or units, office space, retail land and buildings, strata titles or shops here are some essential items you need to take into consideration beforehand.
1. You have experienced professional legal advice
Unless you already have a solid understanding of commercial property law you will need to obtain expert legal advice before you purchase your commercial property.
Make sure you have a professional to go through the laws with you in detail, including taxation, contract, and local government laws. Going it alone or hiring someone who doesn’t have the appropriate experience or only using a broker for contract assistance can lead to serious litigations as well as tax and financial problems down the track.
Before you undertake any part of commercial property purchase, make sure you hire a qualified professional with commercial property buying experience to look out for all the traps and hazards listed in the following points.
2. You know who the owner will be
For commercial property, ownership is complex. Rather than a person, ownership is taken on by a “purchasing entity”, which can be yourself as an individual, but could also be a group of people, a company, a personal trustee, a corporate trust even a superannuation fund, or a combination of these.
You need to have your purchasing entity finalised well before the purchase takes place, that means completing all registrations for a new business if needed. For example, knowing if you are a trust or a company completely changes your Capital Gains Tax in the first 12 months.
Should you fill out the entity incorrectly it can mean additional costs in land tax liability, stamp duty, Capital Gains Tax, or you can even lose the rights to the property altogether.
Get it right!
The entity you enter on the purchase contract is final, and can’t be changed down the track for any reason. The only way to make alterations is if you get permission from all contracted parties to terminate the contract and enter into a new one. This can create legal hassles as well as bring additional fees.
3. You understand the terms of Contract
While commercial properties do come with standard conditions these are usually varied under ‘Special Conditions’. These will vary greatly depending on the type of commercial property involved.
These conditions are complex and can make or break your future business, for example, if you are not able to secure the required permission from the body corporate and the local council, if you sign on to absorb all the legal fees for the contract creation, or if you sign a contract that only enables a certain kind of product to be sold, it can limit your ability to expand.
Usually, if you are representing yourself or allowing your broker to handle the negotiations you will be signing into conditions that you don’t understand, or that have errors that you won’t notice until it’s too late. The consequences can be serious both legally and financially.
Always have your contract carefully checked and doubled checked by a legal professional.
4. You will honour existing leases
The existing contracts held by those currently leasing your new commercial property stand, even after the title becomes yours.
If you are planning to purchase a property that does currently have tenants it is essential that you have their lease reviewed before you buy.
There is potential for any agreements to extend, Incentive Clauses and First Right of Refusal clauses to have an effect on your purchase. You also need to be sure to have any expired leases removed using a professional legal service.
Be especially cautious with unregistered leases; make sure you have a full written agreement on the terms with the original owner.
5. You have Due Diligence in place
There is no need to buy a commercial property on guesswork alone. Having a due diligence clause placed in a contract will give you time to make inquiries with a number of professional bodies about the commercial viability of your potential property.
As well as due diligence you also need to ensure you complete property searches. This will include Land Tax, body corporate and Council searches for records, rates, commercial zoning and the appropriate business use approvals.
It is essential to get a land tax clearance certificate that ensures there is no outstanding land tax owing on the property that could be passed on to you as the new property owner.
6. The property price includes GST
Is the price listed including GST? You need to know for sure. Any kind of ambiguity on the issues of GST payment can cause costly legal hassles, and ultimately, a higher price than you intended to pay.
Commercial properties generally do require GST on the sale price, unless the property qualifies as a ‘going concern’ due to lease that is part of the sale, in which case you will not be required to pay GST. However, this needs to be agreed on by both parties and included in the contract as well as GST recovery clauses.
7. You will be able to submit your Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is an essential consideration when you buy or sell commercial property. This is a calculated amount using the gross sale proceeds minus the original property price (and incidental costs). There are discounts available for certain entities, providing they have held the property for more than 12 months.
Having accurate accounting records is essential to ensure your CGT is paid correctly when you sell your commercial property.
Even if you are confident in commercial property sales every transaction is unique and complex, therefore getting professional legal advice is essential to ensure your property purchase and future business flows smoothly and easily from start to finish.