It’s the age old dilemma: should you plan to lease or own your business premises? There are advantages and disadvantages 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 appreciating asset and a sound financial investment in the long term. There’s also the appeal of not having to worry about massive 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:
- 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.
- Having a professional and expert commercial property developer involved takes the pressure off the tenant shareholder in terms of implementation.
- The tenant shareholder avoids having to incur all the building costs from the outset.
- 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.
- 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.
- 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 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.
For more information please go to www.heartwoodproperties.co.za or call John Whall on 082-4595553.