Common pitfalls of commercial property transactions

Commercial property is an important part of any business plan, whether you’re launching a new venture, expanding operations or managing an investment portfolio.

Understanding potential obstacles when buying, selling or leasing is essential for making informed decisions, achieving results and avoiding costly mistakes.

Raine & Horne Commercial Canberra director Mark Nicholls says careful attention to detail and due diligence is vital to ensuring a successful outcome for all parties involved in any commercial transaction.

“The commercial property sector is typically not driven by emotion, as you might find in residential real estate,” he says.

“Business operators tend to have more specific requirements to ensure the success of their business – requirements that are simply not negotiable.

“Once you know the potential pitfalls to look for, the transaction can proceed to settlement seamlessly rather than potentially falling over at the last minute, which is frustrating for all involved.”

With careful planning and the right expertise on your side, the commercial property sector can offer long-term growth for your business and investment portfolio.

Once you’ve found a property that appears to meet your needs, there are some basic steps to a smooth transaction.

First, look at the zoning of the property and its allowable uses. This is particularly important for tenants and owner-occupiers to ensure they are legally permitted to use the property for their proposed business use.

In the ACT, land use and development are regulated by the Territory Plan administered by the ACT Planning and Land Authority.

Zoning rules outline permitted activities – such as residential or commercial – and may limit building heights, density and environmental impact.

Development approval is often required for construction or changes in land use to ensure compliance.

For commercial properties, the Crown Lease purpose clause also specifies the businesses and services allowed.

Mark recommends, “Always ask your agent about the permitted uses for this property and if they allow your proposed use.”

Once you’ve established the property is suitable for your business, you need to check the integrity of the building structure to ensure the building is safe for your operation and can be appropriately insured.

The integrity of the building structure can be assessed by obtaining a certificate of occupancy for the current fitout.

Mark says it’s important to check for unapproved structures, such as mezzanines, and ensure any additional works have been appropriately approved and certified.

“An oft-forgotten out-of-sight, out-of-mind problem is contamination. If the property was built using asbestos or next door to a petrol station, there may be environmental considerations that could affect the property’s value.”

Depending on the intended use, it may also be prudent to check for easements running through the block, as this will affect future development potential.

While the purchase price is likely front of mind, Mark says when budgeting for ongoing management of your property, don’t forget to consider hidden costs.

If purchasing a strata property, check the body corporate minutes to review management practices and potential special levies, as well as the sufficiency of the sinking fund for future repairs.

Next, consider any internal fit-out costs that may be necessary for you to operate your business.

“The sky is the limit when budgeting for a fitout and costs are dependent on the size of the property, type of business and quality of finishes,” Mark says.

“Depending on your plans, it’s a good idea to engage a fitout contractor and obtain quotes prior to committing to the property.”

Obtaining the right professional advice is also a key factor in the success or failure of the sales or leasing process.

“You want experts in your corner who are familiar with property law, tax and commercial lending,” Mark says.

“From accountants setting up a purchasing entity through to the lawyers who will advise and act in your best interest throughout the conveyancing process, everybody plays their part to ensure a successful outcome.”

Last, but definitely not least, financing any investment can result in a few common pitfalls.

For commercial property, Mark says it’s important to understand the lending criteria and process.

“Commercial property loans typically require a deposit or equity of 20 to 30 per cent, and they often come with shorter repayment periods and higher interest rates,” Mark says.

“A common issue in securing financing is that deals can fall through if the agreed purchase price is significantly above the property’s value.

“If a bank conducts its valuation and finds that the property isn’t worth the agreed price, they are likely to deny the loan or request that the buyer tips in more cash.

“It’s also worth engaging a commercial mortgage broker who will source you the best finance product on the market,” Mark says.

“Sometimes it’s easier for buyers to use their current bank, but you don’t always get the best product if you don’t use a broker.”

Prior to securing a new commercial property, Mark recommends seeking advice from your trusted accountant or financial advisor to ensure you’re purchasing it under a suitable entity, whether it’s in your name, a trust or SMSF.

“There are advantages and disadvantages of each and it’s important to know the differences, especially when it comes to the tax treatment, such as GST and CGT,” Mark says.

For more information, visit Raine & Horne Commercial.