Commercial property costs - explained

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Commercial property costs – explained

Buying a commercial property is a serious financial undertaking. While the process is relatively straightforward there are a lot of costs involved that you might not have considered going into the purchase.

Having your finances in order and understanding the various property costs involved, will make sure you don’t suffer any big surprises that will hit your business financially.

Whether you are purchasing a building to house your business, to rent out to businesses or residential tenants, there is much to consider.

This simple guide will take you through what you need to know about the commercial property costs.

Deposit

To secure the commercial property you will need to pay an upfront deposit, paying the remainder when the deal has been completed. These deposits are usually between 25% and 40% of the overall cost. Investment deals sometimes have higher deposit requirements.

Legal and expert costs

To make sure the deal is all above board and done effectively, you will need to use the services of various legal and property experts including commercial estate agents, solicitors and lenders.

There will be costs involved in undertaking property surveys, examining and exchanging contracts, arranging mortgages and exchanging at the end of the process.

Commercial Mortgage

It is unlikely that you will have the entire amount needed to purchase a property outright and will need to arrange a commercial mortgage with a reputable lender.
Lenders in the commercial market usually prefer borrowers to already have some experience in property investment and commercial property transactions. This is because operating commercial properties, especially those that are mixed-use, require a deeper level of understanding.

There are some things you can do to raise your chances of obtaining the finance that you need to:

  • Be a homeowner
  • Have the deposit available and be able to prove that.
  • Have evidence of savings in the bank.
  • Have previously owned buy to let properties. A minimum of 24 months is the standard.
  • Be able to provide evidence of income (salary, self-employment or from rent).

These are not always essential, but it is worth noting that if you don’t fulfil these criteria it is likely that you will be expected to pay higher rates.

Commercial mortgages rates are priced individually based on the quality of the proposal, with it being dependent on the industry you work in, your experience, the property, length of lease and any tenants.

The changing industry at present, due to COVID-19, and other factors mean it is advisable to research rates thoroughly and keep up-to-date on changing interest rates and lending options.

Stamp Duty Land Tax

If you buy a property that is worth over £150,000 you will be required to pay Stamp Duty Land Tax. This is the current threshold in England and Northern Ireland. In Scotland, you will need to pay the Land and Buildings Transaction Tax and in Wales the Land Transaction Tax.

The Stamp Duty Land Tax is 2% up to £250,000 and any sale above that price has a rate of 5%.

Fixtures, fittings and equipment

Depending on what the property is intended for you will need to factor in the costs of buying and fitting furniture, fittings and equipment. There will also be costs involved in getting professionals to transport, set up and install them.

Also factor in setting up facilities like WiFi and other required IT needs.

Ongoing commercial property costs

Once you have purchased the property the costs won’t stop there. Expect several on-going costs to maintain and protect the property, your business and your tenants. These can include:

  • Maintenance and repairs.
  • Service charges.
  • Insurance.
  • Local authority charges.
  • Property management costs.
  • Commercial mortgage repayments.

Business rates

Business rates are also added as a tax on non-domestic buildings. Set by the Valuation Office Agency (VOA) they work out the rates by multiplying the value of the commercial property by the Uniform Business Rate (UBR).

These valuations are updated every five years and the last revaluation came into effect in England and Wales in April 2017.

Your local council will send you a business rates bill each year. There are special exemptions available like rural rate relief and small business relief.

Energy costs

The property vendor will provide you with an Energy Performance Certificate (EPC) that will show you how energy efficient the property is. This will give you an indication of what your energy bills will be.

The EPC is valid for 10 years and will display an energy rating from 'A' (most efficient) to 'G' (least efficient. You will be looking for the most efficient property possible to keep your energy costs down.

This is a basic guide explaining what to expect from commercial property costs. Things change and the industry is constantly adapting so it is recommended that you do your research and seek expert advice to make sure you get the best deals.

Explore our other guides to find out more about buying and selling commercial property.


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