Property commitments typically run longer than the plans that produced them. A ten-year lease signed on a three-year strategy is a common and expensive mismatch.
Start from the business, not the property
The questions that should drive property decisions:
- What will we be doing in five years, and does that need different space?
- Is the business likely to grow, shrink or change shape?
- How location-dependent are we — do customers come to us, or do we go to them?
- How much have we invested in fitout, and what is its useful life?
- Will the business be sold, and does the property arrangement help or hinder that?
- Where can we recruit the people we need?
Businesses that answer these before looking at premises make better decisions than those that respond to an available building.
Match commitment to certainty
The core principle: the more uncertain your requirements, the more optionality you should pay for.
- High certainty, long horizon — a long lease with renewals, or ownership. Both give occupancy security and justify fitout investment.
- Uncertain — shorter term with rights of renewal, which gives you the option without the obligation.
- Very uncertain — coworking, serviced space, or third-party logistics, which cost more per unit and commit you to nothing.
Rights of renewal are the most under-negotiated term in commercial leasing. They cost the landlord little and give the tenant genuine optionality.
Fitout and the depreciation horizon
Fitout should be depreciated over the period you are certain of occupying, which is the term plus any renewals you control — not the term you hope to stay.
A five-year fitout on a three-year term with no renewal is a decision to write off value. Where the fitout is substantial, secure the horizon first.
Negotiate make good at the same time. Reinstatement is frequently the largest unbudgeted cost in a tenancy, and agreeing at the start that fitout may remain is far easier than negotiating at the end.
Own or lease
Owning your premises is a property investment funded by capital and borrowing capacity that could otherwise go into the trading business.
The test: what return does the business generate on capital employed, and what yield would the property produce? If the business returns materially more, the capital belongs there.
Where you do buy, holding the property in a separate entity from the trading business is common and generally sensible — it separates property from trading risk, allows the property to be retained if the business is sold, and creates a rental arrangement between entities. That arrangement must be at market and documented, or it causes problems on finance, sale and succession.
Property and business succession
This interacts more than owners expect.
A buyer of the business may not want to buy the property, and may not be able to. A property held separately, leased to the business at market rent on documented terms, is straightforward for a buyer to accept and provides the vendor with a retained income asset.
A property tangled up with the business — undocumented occupation, non-market rent, or ownership mixed with trading assets — complicates a sale and reduces what a buyer will pay.
If a sale is contemplated within five years, sort the property arrangements now.
Risks worth reviewing periodically
- Seismic rating. Affects insurance, lending, tenant demand and value. In provincial markets, strengthening can cost more than the value it adds. Know your number, its assessment type and date, and any council notice.
- Natural hazard exposure. Flood and instability overlays receive more attention in planning and underwriting, and they affect insurability as much as consentability.
- Building compliance — warrant of fitness obligations and the compliance schedule, which carry ongoing inspection requirements.
- Contamination, particularly on former industrial or horticultural land.
- Energy performance, increasingly a leasing condition for larger tenants.
Concentration
An owner-occupier has income, capital and borrowing all tied to one business in one location. That is a concentrated position, and it is worth being conscious of rather than accidental.
Diversification does not have to mean selling. It can mean building assets outside the business over time so that retirement does not depend entirely on one sale.
Review it deliberately
Property strategy should be a board or annual planning item rather than something addressed when a lease expiry arrives. Diarise lease expiries, renewal windows and rent review dates years ahead, because the leverage exists before the deadline rather than after.
General information only, not property or financial advice.
