Real Estate Investor Magazine South Africa February/March 2019 | Page 42
COMMERCIAL INVESTMENT
Should you Lease or Buy
your business premises?
BY JOHN WHALL
I
t’s the age old dilemma: should you plan to lease or own
your business premises? There are advantages and disad-
vantages to both, with much depending on the life cycle
and stage of each individual business. The appeal for many
businesses to own their own premises is that it can be an ap-
preciating asset and a sound financial investment in the long
term. There’s also the appeal of not having to worry about mas-
sive rental increases and having the freedom to decide when
to renovate.
However, the challenge for many businesses wishing to own
their business premises is that it can represent a significant
investment and tie up money that may be required in other
areas of the business.
An increasingly popular option for entrepreneurial
companies that ultimately wish to own their own office
buildings, therefore, is a tenant shareholding business model.
In a nutshell how this works is that the tenant signs a long
lease – a typical duration would be 10 years or longer – and in
return they get a 20% shareholding in the business, depending
on the terms of their lease, their financial strength and their
equity contributions.
Here are the major benefits businesses receive when
entering into this type of partnership:
1. The tenant shareholder is very involved in the design
phase of the building’s development which ensures they
get premises which are purpose built and ideally suited to
their particular needs.
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FEBRUARY/MARCH 2019 SA Real Estate Investor Magazine
2. Having a professional and expert commercial property
developer involved takes the pressure off the tenant
shareholder in terms of implementation.
3. The tenant shareholder avoids having to incur all the
building costs from the outset.
4. Once the 10 year lease is up, the building should be bond
free. The tenant shareholder then shares in the monthly
cash flow from the rental and also any proceeds in the sale
of the building should it be sold.
5. Another option is that the building could be rented to
another tenant. In that case tenant shareholder would then
participate as a building owner/investor receiving their
share of cash flow.
6. The tenant shareholder is also required to sell their shares,
which will be bought back from the developers, such as
Heartwood through a share issue, which is a tangible
monetary benefit they acquire.
To date, Heartwood Properties has successfully completed a
number of these kind of tenant shareholding developments. The
model has been tried and tested with both The Media Connection
building and The Business Centre buildings in Johannesburg
and created long term property partners. The most recent tenant
shareholding development is a custom-designed building in
Lanseria Corporate Estate on behalf of Design 4.
SOURCE www.heartwoodproperties.co.za