Commercial Letting in Malta – Part Three

Leasing a Commercial Premises based on your business needs.

Now that we have covered everything that a Lessor needs to know before investing in a commercial property, it is time to focus our attention on the other side of the coin; the Lessee. Various factors need to be considered before committing to leasing a property, regardless if you represent a small, private business or the largest of corporations.

First and foremost - Why lease?

This question is quite broad however, there are plenty of reasons which point towards opting to lease a commercial property rather than purchase one.

1 – Cost-Saving and Liquidity Protection

When thinking about this question, you must always consider the business size and financial backing behind it all. Regardless of being a multi-million Euro corporation (such as an iGaming Company) or a local stationery, the fact remains that every cent saved is a cent kept within the business. The cost of leasing a property is much smaller when compared to purchasing it and even though a purchased property would be considered as an asset, the actual liquid cash available would be decreased significantly.

2 – Economic Climate in Malta

The actual market in Malta and current European financial climate makes is more viable to lease a property. The recent ‘Brexit’ also plays a part, with the Euro gaining in value against the Sterling meaning that corporations established in the UK can potentially move here to protect their share value by switching to a Euro-based capital structure. These possible relocations to Malta mean that a developer must continuously improve the quality of the commercial premises available for lease to match the standards expected from foreign corporations. In return, the available properties will also be of a higher quality to local companies, at a relatively low cost due to the economy not allowing for very high leasing prices!

3 – Moving up the ladder/ expanding the business

Since leasing a commercial property allows for much simpler relocation, should the business require more space due to growth or even open up more branches, the lessee has a significantly less difficult task to do so. So many supermarket chains, sporting goods retailers, even restaurant franchises and banks have opted to lease instead of investing in the property for this very reason and it is a strategy which over the years has proved to be very successful if implemented correctly.

So what do I need to consider before leasing a commercial property?

There are several factors which need to be given individual attention before going ahead and signing a commercial lease agreement for a new premises. First and foremost, as a business owner, you must identify your goal. This means that after you have concluded your business plan and financial year targets, you must ensure that the premises you choose to lease will allow you to reach those targets.

Step 1 – Calculating your comfortable monthly/ annual leasing budget

This is probably the single-most important decision which needs to be taken when considering which property you would like the company/ business to operate from. As a standard rule, the expenditure required in leasing a property should never exceed 10% of your revenues, and even this figure can sometimes be too much. The safer option would be 5% or 8% because when added to other operating costs, such as utilities, insurance, salaries and unforeseen circumstances, you never want to find yourself short in liquid assets and the repercussions (not just for missing a rental payment) can be disastrous for the business.

A small business, such as a 60 SQM clothing shop, for example, which renders €15,000 in gross revenues (with a 25% markup in prices) and employs one salesperson, should think of the below general monthly expenses as a guideline:

Water & Electricity - €65
Salesperson Salary - €1,000
Insurance - €50
Purchase of new stock - €1,000

Since the markup (sales gross profit) is set as 25%, the business owner would gain €3,750 and is left with €1,635. Not considering VAT and miscellaneous expenses, the monthly rent value for this type of business should not exceed €750 as this would leave €885 cash in hand. This is a very general example but it shows that even though €750 in monthly rent is relatively on the cheaper side; it still can eat into the liquidity of the business owner.

Step 2 – Choosing the ideal location for your business

In certain situations, such as the case for an office, the location (whilst always important) is not vital since the service being offered is not related to the actual physical area of the office itself (does not need walking trade). However, most business, such as retailers, hotels, restaurants, bars, hair/ beauty salons, etc do require high visibility, easy access to the consumer and large volumes of passing trade.

For this reason, the location is of the utmost of importance so you must always, aside from asking your commercial letting agent for help, do your own research on how easy and often potential customers can find and enter your place of business. The location is also important if the premises are brand new and the importance of research is further highlighted in another factor discussed in another point in this article; permits.

Step 3 – Size

Though quite an obvious factor, ensuring that you do not have too little or too much space within your premises is also quite important. Too little space is simple to understand; not having enough room to accommodate your needs will result in missed opportunities, less revenues than being capable of generating and of course, eventually lead to having to move into a different property and lots of needless work and expenses.

On the other hand, having too much space (unless a fast growth-rate is expected) is also not ideal. You will be paying for a footprint which is needless and not generating revenues whilst adding to your costs. Remember that maintaining a large property as well as running it (air-conditioning costs will be higher to cool a large room, utilities will cost more, etc) are not cheap and the wasted money could have easily been used for things which actually improve and add to the business.

Step 4 – Permits, licenses and possibilities

It is always recommended that when opting to lease a commercial property, the permit required for your specific business use is already in hand. All the different type of Planning Authority (PA) permits were covered in Part 2 of this series, with the link being here. However, sometimes it just so happens that the premises found is too perfect to miss out on, even though the permit might not be the one required.

In this instance, one must consider if:

The permit can be changed into the one you need via a simple Change of Use Application or
The permit must be applied for from the very beginning (Full Development Application)

In the case of a change of use, such as switching from a 4B retail permit to a 4A office/ professional service permit, the process (in most cases) is quite simple as one simply needs to check with the PA if it can be done, pay a fixed €250 fee and have the permit changed within four to six weeks.

However, if the current permit falls under a different category altogether, such as a large office (4A) needing to be converted into a daycare center (2C) the permit can take up to six months to be changed, run into the thousands’ of Euros in expenses and even require additional scrutineering, such as the MTA and Language Board, to be given the relevant license needed to operate. Such changes take time and in most cases, the lessee must still pay the lessor the monthly lease with no guarantee of being awarded the permit. Other factors, such as health and safety approval or sale of alcohol licenses (if the establishment is a catering one) can also not be granted for many reasons. The required permit itself can also simply not be granted by the PA if the location of the premises is in a designated area which doesn’t permit certain commercial operations!

There are ways were your Commercial Specialist can assist in these cases, such as researching all this information, negotiating a moratorium (rent-free) period or having the contract be subject to issue of permit, so always ensure that the person entrusted to assist you in finding your commercial property is an expert in the field!

Conclusion

Commercial Letting is growing at a fast and stable rate, simply because the needs and available opportunities of today allow it to. Both from an investment point of view as well as a business looking to lease a property instead of buying, there has never been a better time to make the leap and with proper research and thought, the gains and benefits can be unprecedented.

For any commercial property inquiries, my colleagues and I here at the Quicklets Msida branch are here to help and guide you on the best possible solution based on your needs. We specialize in commercial sales and letting so feel free to contact us through the various channels available below:

Quicklets Msida Facebook Page

https://www.facebook.com/Quicklets-Msida-389515531173104

My own Commercial Letting Facebook Page

https://www.facebook.com/simonzammitquicklets

Quicklets Msida Address

216, Marina Street, Pieta

Email Contacts

Simon (Commercial Specialist) – [email protected]

Luke (Msida Branch Franchise Owner) – [email protected]

Until next time!

Regards,

Simon Zammit