Do you need finance to buy a building for your business?

Buying office premises for your company can make a lot of sense once the company has a sustainable income. Rather than paying rent to a landlord, the company would be paying off a loan and gaining a valuable asset that increases in value as time goes on. 
Please note that this module does not deal with buying office premises as an investment, so that you can rent office space to other companies.

Deposits and collateral

If you're looking to raise finance for commercial property for your business, and you have a minimum of a 30% deposit (this can increase to 50% when there’s an economic downturn), then you’re in luck. This finance market is fairly well developed in South Africa. The property itself can be used as collateral, which gives lenders the surety they need to loan you the money. Since the title deeds are in the lender's name, they own the building until the loan is repaid and can sell it to recover the money if you default on payments.

Weighing the costs

It's very important to calculate all the costs associated with owning your own premises e.g. you would now be entirely responsible for the upkeep of the property and for paying all municipal costs. A further point to consider is that property loans for businesses are for a shorter period than the usual 20 year bond period allocated to personal houses. What this means is that initially, your repayments might be higher than the rental you are currently paying.  
However, you do need to take into account that office rentals increase each year, whereas your loan repayments only increase if the interest rate increases.  Within a few years, your loan repayments should be considerably less than the rent you would be paying for your office if you were still renting.
Another consideration is the size of the property. You certainly do not want to buy premises only to find that in a year’s time, your premises are too small for your needs. The property itself needs to accommodate all your current space requirements and have room for your estimated growth. This is always an issue because buying for future space needs means an increase in immediate costs, but you don't really need the space now.  So you will need to find a balance between making sure there is sufficient room for growth, at a cost that you can afford. 
This also means that your planning would need to work through scenarios that show what you would do if high growth takes place much sooner than expected and likewise, how you'll cope if it doesn't happen at all. If you know the financial implications of these two scenarios, you will be much better placed to discuss loans with a lender.

Lenders and tenants

Generally speaking, lenders are wary of lending you money for a building if you can only finance it by renting out rooms to other companies. If this is the only way that you can afford to purchase your own office space, then you must build a compelling case to convince lenders that there are no risks attached to the tenants with this rental model. 
Lenders only lend you money once they have your business and personal credit ratings, and have investigated how you conduct your finances (business and personal). This helps them to make a decision on how much risk is attached to lending you the money. You would need to do a similar investigation into your tenants to be sure that they will honour the lease agreement, and not leave you out of pocket.

The type of building influences the loan

It is more challenging to sell properties that can only be used for a single purpose, such as a movie theatre, hostel or gym. These properties have to be customised to fit the business needs, and therefore are more difficult to sell.  
So, if your property is difficult to sell, the lender will be worried about loaning you money, and may not be prepared to consider the building as collateral for the loan. In this case, lenders often expect you to put down a much larger deposit.

Joint ownership

Sometimes businesses collaborate to jointly purchase a commercial building that will provide premises for their respective companies. This can definitely be an option, but it is very important for this type of deal to be properly structured to make sure that all parties are equally protected. It would definitely be useful to meet with a business advisor or lawyer to discuss the pros and cons, and get assistance with drawing up legal documents required for the purchase.

Some of the challenges you could face are:
  • Making changes to the building to suit your needs. If you have co-owners, you will need to get their formal permission to do this.
  • Investing in a business provides you, the business owner, with a nest-egg.  If you have co-owners, they might suddenly demand their portion of this investment, and you might have to buy them out or sell the building to pay them.
  • The building can be used as collateral for future business finance. Co-owners could complicate this, as you would need their permission to do this. If a building has been ceded as collateral, it may lessen their investment.
Most of these challenges can easily be resolved by drawing up an agreement that clearly states responsibilities, ownership rights, cost and profit sharing,  buyout terms and conditions, and so forth. It is advisable to seek professional assistance in drawing up such agreements.
Lenders will thoroughly check out all the potential owners before committing to providing a loan.

What are your options?

Below is a list of the most common types of loans available for buying premises for your company. Do bear in mind that some of the niche small business lenders have their own unique products to buy premises, or are prepared to loan money and customise the terms to suit your specific requirements.