Building Premises: Asset or a Millstone?

September 19, 2014

Buildings are a fundamental part of any business. They can be your best friend or your worst enemy. Sean Marshall, Director of Prendos, considers the risks and rewards of choosing the right property and some of the pitfalls to avoid in the process.

So you need new business premises. You’ve probably thrashed out where you want to be and how much space you need. You may even have considered how a place fits with your corporate image and what the transport links and parking provision is like. You’ll have a lawyer and an agent on board. So, she’ll be right?

The reality is that, essential though they are, lawyers and agents can only go so far in protecting your business interests. As with most transactions, the question is how much risk you’re willing to take. It’s an unfortunate fact that, all too often, we’ll get involved when business premises aren’t working for one reason or another – the proverbial ambulance at the bottom of the cliff as it were. And the numbers involved can be scary. Informed would be tenants and investors do their homework – better to spend a little now and know what your risks are than have them unexpectedly derail your business plan in 5 years’ time.

So what are we talking about? Well, there are out and out cost risks or liabilities. If you’re leasing, these will include your lease obligations to maintain, repair and decorate. If you’ve not done your bit at the end of the lease, expect a bill (or worse, a legal claim) from the landlord. But the landlord does most of the work, right? In most cases, yes, but some of these costs will be recoverable. Your contributions to what are often called ‘outgoings’ could be significant – even if the figures you’re given for the last few years seem palatable. You’re also going to want to make your mark on your new premises, whether that’s signage or a full fit-out to suit your needs. Unless you carve this out in your lease, the landlord can charge you for putting the place back to how it was. A good quality premises condition report at the start of any lease avoids any doubt about what you’re responsible for. It may seem obvious at the time but after ten or fifteen years, what the place was like when you moved in is usually a dim and distant memory. Every lease is unique – even the standard forms get tweaked and amended, so don’t rely on what happened last time.

Now and again you’ll get a nasty surprise. The extra work you had to do as part of your fit out that you weren’t expecting. Or the interruption to your business when the landlord has to do disruptive works, perhaps even scaffolding and wrapping the building. Worst case scenario is that your premises simply don’t meet your needs. Finding out whether you’re leasing a dud doesn’t have to be a gamble. A bit of sound technical expertise invested wisely will give you a good idea of what you’re in for. If you’re going to seek the advice of a chartered building surveyor who’ll also be designing and managing your fit out works, you’ll get someone who understands your needs from day one. It’s also not uncommon to have fees for up-front work offset against the cost of designing and managing the works – a win-win for both parties.

Premises are usually a medium to long term investment for a business. It’s important to understand and consider your future needs, not just current. Are the premises flexible enough to accommodate growth or change? That could be a question of whether the floor can take a mezzanine to increase the useable area in an industrial unit or whether the HVAC can take an increase in occupation density (staff numbers) in an office. It could be the difference between having to relocate or not. Think about what your future business needs might be for the premises and communicate this to your advisers. This should also inform how you structure your lease term and renewal dates – your ultimate fall-back.

So far we’ve looked at some of the risks. But there are less obvious benefits to be had for those with the foresight to look. Key amongst these is sustainable buildings. These often command a premium but don’t be too quick to discount them – they do so for very good reasons. The obvious one is lower running costs. Energy efficient buildings, all things being equal, cost less to run. And energy isn’t getting any cheaper so the benefits will get better with time. Aside from how good, bad or indifferent you feel about sustainability, it can be an emotive point for people, including your clients. Occupying green premises can raise your profile and public image a notch or two. Probably the least tangible benefit and potentially the most underrated is the impact of green buildings on workplace productivity. More and more studies around the world are concluding that green buildings are nicer places to work. Businesses that occupy them enjoy higher staff productivity, lower absenteeism and better staff retention. When you consider that staff costs can be ten times your property costs, a 1% improvement in productivity could equate to a 10% reduction in premises costs. Now consider what a 10% productivity improvement could do.

You may have the opportunity to buy or lease premises that haven’t been built yet. Committing to a building that doesn’t yet exist, usually through an agreement to lease or purchase, can be particularly risky. After all, there is nothing physical to look at and interpreting plans, even for the initiated is fraught with risk. Unless you have a boiler plate option to walk away without risk to your business, technical as well as legal advice should be considered essential. Technical due diligence will assess the building design against your requirements and identify any design, construction or procurement risks before you sign on the dotted line.

To have maximum benefit, your adviser needs to understand your current and future needs, your proposed lease obligations and have a technical understanding of how buildings work (and fail), how they are maintained and the cost of doing so. This happens to be the particular skillset of chartered building surveyors – a profession that has developed in the UK over the past fifty years.

In summary then, it pays to be informed.

To find out more about how Prendos can assist with your commercial building please contact us or visit our commercial property consultancy section of the website.

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