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How to work out a budget for taking on commercial premises

There's no such thing as a free lunch - or a free office for that. So how far does your budget stretch?

Looking for premises is similar to buying a house: you never have enough money for your dream house so reluctant to settle for second best you end up either borrowing more than you can afford or going down market with the hope of making a killing in a few year’s time.

Similarly, too many businesses sign up to lease offices they can’t and will never afford, while others plump for the cheapest premises going and spend the next few years trying to get out of them.

You don’t have to live in your premises, but you might find you spend longer there than at home so finding a happy medium is essential.

Tenure

Buying can take a huge slice out of the available resources of a small firm. In most cases it is better to rent. But be aware of the obligations this imposes.

Leases are hefty and complex contracts and can tie a business to payments far into the future – sometimes as long as 25 years. Tenants become legally bound to insure, maintain and repair premises, all at their own expense.

Leases usually prevent disposal or sub-letting without written consent by the landlord, which may be difficult to obtain. They often contain covenants that restrict any change of use to some other business. And at the end of the lease, a tenant is expected to hand back the premises exactly as they got them – or pay the costs of restoration.

In the meantime, rents will be reviewed regularly – usually every five years. Most leases demand they will always rise, no matter how the tenant’s business is performing at that time.

This seemingly draconian situation has some loopholes, however. Most landlords are aware that small businesses, particularly startups, cannot commit to long leases and offer much shorter terms of a little as five years. Break clauses can be included, allowing the tenant to leave before then without penalty.

Licenses, which are much simpler than leases, are also available.

Condition

The heavy financial responsibilities of either buying or leasing property mean it would be extremely foolish not to have buildings checked out before signing on the dotted line.

However, beware of confusing valuations and surveys. In simple terms, a valuation will explain what a building is worth. It is crucial when borrowing to buy, or just to raise capital for the business.The report will consider how premises are used, the location, the likely demand form other occupiers and the local market rents.

It will take into consideration the structural condition because this has an impact on the market value. But too few people realise that it will not dig far below the surface. This requires a structural survey. These come in a variety of colours, ranging from a fairly superficial summary of cracks in the ceiling to an in-depth analysis of the roof, walls and foundations. Further inspections of wiring, drains and sub-soil may be needed from a range of specialists.

Costs can run from hundreds to thousands of pounds, depending on the age and condition of premises. But the up-front cost has to be set against even bigger repair and maintenance bills in later years.

Ongoing Costs

Once you have moved in, the pain does not go away. The whole point of initial surveys is to point out the potential maintenance burden – possibly over many years. Remember that even when leasing buildings, these are the responsibility of tenants rather than landlords. Other ongoing costs must also be considered when choosing premises, however.

Insurance must suit the premises and the purpose to which they are put. That will require another assessment – and the temptation again arises to cut costs. But don’t be tempted. Under-insurance can wipe out a business if the worst happens.

Business rates are a major burden, often equating to the rent on premises. Local authorities keep lists of ratable valuations but these change every five years. It is usually worth checking with an expert whether the burden can be reduced but watch out for cowboys. They swarm all over small businesses, promising the earth and then disappearing.

Service charges are another hefty cost. Older buildings will be more expensive to run, which can offset any reduction in rent over more modern ones. Landlords also charge for services they provide in multi-let buildings. This can be a constant friction and care must be taken to pin down exact responsibilities at the outset.

Moving On

After running this sort of obstacle course and building a successful business, most entrepreneurs might believe the course upwards and onwards to larger premises should be relatively painless. But there is a sting in the tail.

You then have to sell or get out of the lease. You may also face what is called a dilapidations charge, which simply means paying the landlord to put the place back in the condition when it was let.

Never buy anything without considering whether it can be resold. What is perfect for one business may not appeal to others. And make allowance for the fact that landlords do not like losing good tenants. They can force you to stay until another business of equal standing comes along. Or you may end up sub-letting at a loss.

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