Can somebody help me to understand why it is preferable, for accounting purposes, to have an office building stood empty rather than letting it out at a lower rent?

There are loads of empty office buildings in the South of England (all with an ‘Office space to let’ sign) and yet developers are still building more offices. What does the landlord stand to gain by owning empty offices?? Why not build houses/flats which will sell/let quickly?

The company that I work for rents office space in location A whilst owning an empty office building in location B. We used to have a tenant in location B, but it has been empty for several years now, surely we’d be better off letting it out at a reduced rent rather than leaving it empty?? When I suggest this, I’m met with an “it’s all to do with accounting” response, but no further explanation.

Anybody got any ideas??

It’s all to do with accounting.

money laundering.

Someone explained this to me once down the pub…

Short summary (probably wrong) if they have cash on the books it can be taxed. If they spend it on assets (like new buildings) it isn’t.

Not just offices. There’s a place down the road from me which I think would make a brilliant bike shop (this place) but it’s been empty for more than a decade and needs totally gutting and rebuilding.

So I asked the letting agent how much they wanted for it.

£60,000pa.

Apparently it’s in a prime retail location on a busy throughfare and only needs a little fixing up. I don’t know if the owners are delusional or what.

AIUI it’s they have borrowed money to buy the property based on a certain rental income. If they accept a lower rent, it would compromise the terms of the loan so it’s preferable to keep the place empty as the rent hasn’t gone down.

Yes, I’m sure there are strong commercial reasons – but sometimes I wonder if they don’t actually grasp reality. For example the letting agent made a strong point of this shop’s prime location on a busy throughfare – but it’s a dual carriageway with no stopping or parking.

AIUI it’s they have borrowed money to buy the property based on a certain rental income. If they accept a lower rent, it would compromise the terms of the loan so it’s preferable to keep the place empty as the rent hasn’t gone down.

But what on earth is the point of that?? They end up massively in debt..

Short summary (probably wrong) if they have cash on the books it can be taxed. If they spend it on assets (like new buildings) it isn’t

I can understand investing in assets, but surely a building is a liability, the owner has to pay council tax, water rates, etc etc???

But what on earth is the point of that?? They end up massively in debt..

Not if the loan was cheap and only a small % of their portfolio is empty….

I thought you could write off a lot of the tax by letting it to a company that then goes bust – not sure of the exact scam though

Yes, I’m sure there are strong commercial reasons – but sometimes I wonder if they don’t actually grasp reality. For example the letting agent made a strong point of this shop’s prime location on a busy throughfare – but it’s a dual carriageway with no stopping or parking.

That’s the letting agent though. They are clutching at straws trying to justify an overpriced rent that their customer has insisted on (for whatever reason)

They know its bobbins, but what choice do they have.

Not if the loan was cheap and only a small % of their portfolio is empty….

That I could understand, but the business park that we’re in is 10 years old and has only ever been half full at most, I just don’t get it………

Yes there will be bills associated with the empty building. All of which can be claimed back before tax. It probably works out that the cost of the empty building is less than the tax benefit it brings to the company hence why they aren’t too fussed about renting it out. Especially if it is appreciating in value.

That or they are lazy and so loaded they’ve forgotten they own it?

natrix, you don’t work in our business park do you? It seems to be half empty most of the time.

Not sure how that would work really ?

Let’s say it costs £10,000 / year in upkeep/rates/etc.

They can offset that against their profits to pay less tax.

But making £10k less profit, is never to mean you pay £10 less in Tax !?

natrix, you don’t work in our business park do you? It seems to be half empty most of the time.

I think that most of them are half empty….

Mines got a nice little river running past it and is handy for the train station and Tesco.

I imagine it’s more likely to do with provisioning (IAS39)

I used to do a lot of IAS39 stuff for corporate clients. Very very simply, once you’ve done a sublet deal you have to capitalise any difference between the economic cost of the headlease and the economic value of the sublease, you then take that capitalised shortfall to the balance sheet via the P&L during the period that the sublease is struck. If on the other hand you hold space empty, but dont classify it as surplus to business needs just yet, then you dont necessarily have to recognise the future liability of that excess lease on the balance sheet you can simply book the rental cost as it comes payable.

Accountants: more than slightly responsible for just about every stupid decision a company has ever made. For the record I am not an accountant and have been known to often argue with them. Not least because I married one and my mum is one.

It’s not our’s then. We are miles from anywhere and have only a Morrison’s for basic provisions.

*edited for appalling spelling…*

…Very very simply…

I didn’t understand any of that, but then I am very, very simple…

I was recently looking for a smallish office space but would have been happy with an industrial or warehouse type of space too. I moved out of my Newcastle studio and assumed I’d find something closr to home (near Durham) for about the same money. Most of the rents I was offered were double the Newcastle place, which surprised me.

And yes, most of the spaces were in half empty industrial estates 👿

Can you do that in English, Stoner?

On a completely unrelated topic, do you have anything to do with WRAG?

On a partially unrelated topic, I’ve often thought about renting a small industrial unit where I could make stuff and make loads of noise. I’d also like to live there. On the face of it, seems like a cool, cheap way to live. Am I missing something?

Yes.

B2/B8 (Industrial) planning permission will preclude living in the premises.

However, there is a movement to create more combined residential/industrial premises in the style of a kind of “Studio workshop style”.

If you owned the industrial premises you might have a go at living on the site “under the radar” and then move for a certificate of lawful use after 4yrs. If you are a tenant you will do very well not to have a landlords’ inspection uncover that you had been living on the premises and then even if you managed to get planning permission after the fact, the landlord might well throw you out first.

Dont forget that any commercial premises will attract a rates charge, usual equal to a little under half the rental value of the property.

Yes, I assumed it would have to be ‘under the radar’. Any attempt at living in even a slightly different way in this spiteful little country is probably illegal.

I used to know a guy that used to live in a small railway arch, the line above was decommissioned. He had a little music studio, living area, and used to throw the occasional party with a bar to raise some cash. I think it all got redeveloped in the end. He seemed pretty happy though..

I guess if one is living ‘under the radar’ then the increase in rates could be offset by the lack of council tax paid. Not that I endorse such a heinous move, just thinking like a business/corporation.

Yes, I did mean a small studio/workshop, rather than a warehouse/factory. I wonder when ‘regularly burning the midnight oil’ becomes ‘living at the premises’ and how this is policed.

Sorry for hijacking the thread by the way.

jambourgie, read stuff here

Home – The Land Is Ours

particularly the Chapter 7 stuff
http://www.tlio.org.uk/chapter7/

Lots of useful info and case studies on sustainable living/working and trying to do it inspite of the lousy UK planning system rather than because of it.

Thanks Stoner. It’s something I’m really interested in. From living in a houseboat, to building a treehouse on common land etc etc.

AIUI it’s they have borrowed money to buy the property based on a certain rental income. If they accept a lower rent, it would compromise the terms of the loan so it’s preferable to keep the place empty as the rent hasn’t gone down.

This, everyone has to play the game that the property is worth ‘x’.

House of Cards 🙂

to building a treehouse on common land etc etc.

I wouldnt encourage that.

Common land is for the use of everyone*, not the use of anyone.

(*actually most common land only confers rights of use on a limited group of people, everyone else usually just gets rights of access only)

AIUI it’s they have borrowed money to buy the property based on a certain rental income. If they accept a lower rent, it would compromise the terms of the loan so it’s preferable to keep the place empty as the rent hasn’t gone down.

I missed that. It’s actually rarely like that at all footflaps.

The loan covenants will usually include an income cover ratio: being the ratio between the interest payable on the loan and the rent being received at any point in time. Being unlet is to receive a lower rent than being let at a low rent. That would increase the likelihood of breaching the ICR covenant.

More often, maintainiing headline rents (i.e. the ones that get quoted in deal sheets) is far more important to maintain the overall ERV of an area/business park. (ERV = Estimated Rental Value). Fudging the headline rent, by doing a deal at that rate, but then softening it with rent free periods or capped service charge rates etc is quite normal. Its when the softening gets carried away just to get a tenant in to absorb the rates liability that it can damage the underlying Value of the property. And that’s when the banking covenants might come in: namely, the Loan to Value ratio (LTV). The loan is a set amount, the value can move around (although only when a valuation is required, and that might usually be limited to no more than once a year) – if the ERV has dropped massively because the landlord (or another neighbouring landlord) has done a really soft deal, denting the rental value of the are, then the underlying Value will fall, the debt has remained at the same level so the LTV ratio has risen, probably breaching a covenant threshold and causing all sorts of pain to the landlord. And usually RBS 😉

So, no, landlords rarely prefer empty buildings to rented buildings. Particularly since vacant building rates relief was abolished.

OT. Hey Natrix, Do you want those mags? Check back on the other thread for contact details.

I wouldnt encourage that.

Common land is for the use of everyone*, not the use of anyone.

(*actually most common land only confers rights of use on a limited group of people, everyone else usually just gets rights of access only)

Wrong choice of words/terminology. I kind of meant land that isn’t owned by anybody. But I think that’s probably unheard of in the UK.

Thank for that Stoner, most interesting.

not at all.

[hijack]
aracer – sorry missed your qu earlier. Im not directly involved in WRAG, but I am close to one of the founders and am helping out in small ways. I’m a little torn as although the proposed development is actually close to me and even effects my views, Im not 100% against development – I’m no NIMBY – but that position puts me at a bit of a minority in the village. I think the style and scale is inappropriate though. The expectations of the land owner and the developer could do with a bit more modesty.

Im more interested in the creation of the local development plan though, which is related to but not the same as WRAG.

What is WRAG?

a local group campaigning against a planning application to build a load of houses on farmland near the village. aracer has a similar issue elsewhere in the county.

OT. Hey Natrix, Do you want those mags? Check back on the other thread for contact details.

Yes please, have replied on other thread.

I’m an accountant and I do not think that its anything to do with an ‘Accounting treatment’.

Unlikely to be IAS37 – provisionsing as the leasee will have the liabitliy on the balance sheet – not the lessor. (Also unlikely to be preparing under IAS – unless a listed plc).

Maybe bank covenants??!?

End of the day they are trying to rent it for more than market rate – no demand – so suggest reducing the rent to a more realistic level.

Im talking about IAS37 applying to lessors who become reluctant landlords, hence “sublease”, unless of course IAS17 has been implemented properly yet and the lessors headlease is already capitalised as a finance lease? I tuned out of accounting for leases 8 years ago.