28 | LEGAL
Why lease land when you can own land? The pros and cons of being a commercial land owner by Tony Raunic, Managing Principal, Hunt & Hunt Lawyers.
W
hen deciding where to base your self storage facility, you have the option to either lease or buy land. You should consider the pros and cons of investing in land. You should also think about the differences in how you’ll be able to use the land.
WHAT’S INVOLVED IN BUYING LAND? Upfront spending Unlike leasing, buying a commercial property requires a significant amount
of upfront spending, which includes paying stamp duty which can be as high as 5.5% of the purchase price in some Australian states. This expenditure will of course impact heavily on your bank balances, limiting the money you have available to establish and grow your business. Depending on the state of the land, you may need to spend more money on land and building modifications so that the property is ready to operate as a self storage facility.
Financing Given the significant purchase cost of land, you will probably need to obtain a mortgage from a financial institution to help fund your purchase. Commercial loans to buy land may require you to provide an initial deposit of between 25 and 50 per cent of the purchase price. However, interest rates are currently at an historic low so repayments are somewhat easier presently. Over time, mortgage repayments will generally be preferable to paying rent.
PRO’S AND CON’S FROM AN SSAA MEMBER WHO HAS EXPERIENCED BOTH LEASING AND FREEHOLD Freehold PROS:
Leasehold PROS:
l Tenure. Ownership is an ‘unlimited by time’ investment
l Capital deployment to business model rather than property holding. Fit out capital only required
l Freehold ownership allows the property to be mortgaged as security for funding
l Availability of tightly held property to be secured when freeholds cannot, opening up locations that are otherwise limited
l Freehold has an incremental value uplift as a general rule (but not always)
l A true business focus model in retail sense
l Freehold works don’t require landlord approval
l Capacity to adapt to hub and spoke locations often mixing freehold with leasehold to protect location from competition
l Long term property play
l Smaller sites are practical and viable
l Alternate use options become relevant over time as property market changes. Potential value uplift
l Establish facility in high density and high profile locations areas where freehold unlikely or not highest use of property
l Traditional SS facilities have been property based with an underlying valuation methodology based on cap rate and yield. Known and predictable outcome
Leasehold CONS:
Freehold CONS: l Large scale investment requiring significant capital. Barrier to entry
l Retail leases act protections l Escalating rent structures l Only security that can be offered is mortgage of lease requiring landlord approval. Banks lack of understanding of funding leaseholds l Landlord approval required for all works and fitouts l Risk of landlords changing and with that possibility of conflict
l Availability of sizeable parcels of land or buildings in high density population areas is limited
l Need for long tenure to justify fitout capex, minimum tenures around 25 years to build value and justify capex
l SS not always highest and best use for property
l At end of term business relocation or closure
l Significant capital to both acquire and to fit out
l Valuation methods not clear. Restrained valuations
l Locations limited
l Sale of business requires long term remaining tenure. Exit planning can be problematic
INSIDER 111 FEBRUARY / MARCH 2020
l Availability of suitable leasehold premises l Loss of full control over every element of the site
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