When delving into the world of commercial property investment, understanding the associated costs can be complicated to master. After all, it is imperative that you understand what you need to pay, why you need to pay it, and who to pay it to in order to remain legally compliant with current property law and legislation. It can seem like quite a daunting task, which is why Centrick have compiled everything you need to know about understanding the costs associated with commercial property so you can be rest assured you have everything covered.
Firstly, it’s important to understand the basics by understanding what a commercial property is. A commercial unit is one used for business operations, as opposed to residential property, which is primarily used for domestic dwelling. These properties are directly associated with profit generation, and come in the form of:
But what costs are these commercial properties subject to that are similar and different to their residential counterparts?
This may be quite an obvious cost, but acquisition fees for your property will likely be the most expensive aspect of your commercial investment. Akin to purchasing or renting a residential property, you will have to acquire your commercial unit from its existing owner by either purchasing the property outright or paying a monthly rental fee. This will constitute the majority of your budget, and much like with a residential unit you may need to borrow funds to afford the upfront purchase.
Stamp Duty Land Tax is payable on commercial properties and residential properties alike. For purchases of £150,000 or more, Stamp Duty must be paid, but the proportion of tax payable depends upon a number of factors such as whether your unit is freehold or leasehold. To simplify the process of understanding how much Stamp Duty you must pay on your commercial unit, the government have a handy tax calculator.
Fixed or proportional service charges in commercial property are typically payable by commercial tenants to their landlords, unlike in residential cases wherein service charges in commercial property may be payable by leasehold property owners themselves rather than their tenants. This is usually the case when your unit, commercial or residential, is part of a broader complex that contains other facilities.
For new and old commercial properties alike, you will need to put aside funds in case of a maintenance emergency, as well as to take care of planned maintenance. This is a similar approach to residential property ownership, with certain tasks – such as damp prevention, for example – being necessary on a regular basis, and an emergency fund being necessary in the event of a larger, unexpected repair.
Energy is the single largest operating expense for commercial properties, with gas and electricity bills often being hefty in these buildings thanks to the sheer number of individuals working there at one time. Lighting, routers, desktops, telephones, kettles, microwaves and security cameras will all drive up energy costs, not to mention the water bills that you will receive for your commercial unit. It is also important to remember that whilst there are residential property energy price caps, the same do not exist for commercial units, which makes such utility costs prone to rising – be sure that you account for the often fluctuating cost of energy bills at your new commercial unit before committing to a purchase.
This is a tax on the occupation of non-residential units, otherwise known as a ‘non-domestic rate’. These are issued for the coming year to all businesses in Q1 of each year and are applicable to all organizations that use a building for commercial purposes. However, if you operate a unit that endeavours to care for disabled individuals (i.e. nursing homes), you work from an office in your home, or your business operates on farm land, you will likely be exempt from paying business rates. Other businesses, such as SMEs, charities and companies experiencing economic hardship may be eligible for business rate relief. As with all tax types, businesses can predict and forecast their business rates using an online calculator.
Commercial property insurance is a fee paid to an insurance company to ensure that, in the event of any damage, your unit and its contents are protected. It protects the bricks and mortar of your business in the same way that home insurance does to your domestic property. This ensures that you won’t fork out immensely expensive fees in the event of any unexpected damage, such as burst pipes, natural disasters or fires. However, intentional negligence, poor craftsmanship and general wear are usually not included in building insurance. Although not a legal requirement for property owners, it is highly recommended that you guarantee the safety of your commercial unit with the appropriate insurance.
The sale or lease of a commercial unit is typically exempt from VAT, however Value Added Tax can be charged on commercial property purchases at the current standard rate of 20% in some cases. Although charging VAT is not feasible for some businesses who aren’t in a financial position to recover the tax incurred on the costs, charging VAT can be valuable where expensive refurbishments have been required, for example. It may also not be appropriate to charge tax in all cases, especially with buildings being used for charity or healthcare-related businesses. However, if you have been charged VAT, landlords are able to recover any tax that has been charged during the sale.
Whether you’re a first-time commercial property investor, or simply looking to make sure you’ve covered all bases, Centrick is here to help you understand the costs associated with your commercial unit. Our team of property experts have over 15 years of experience helping our clients find the perfect property, maximising the potential of their investment and ensuring that they have access to the information to help them make an educated decision. Contact our team of dedicated commercial experts using the form below:
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