Champagne taste on a beer budget. If you work with clients and office designs this is a common scenario.
Some fitout designs and budgets are simple and affordable for clients. Other plans require significant funding and consideration and can seem out of reach. Providing clients with some useful funding avenues to explore may be advantageous for all parties involved.
The established convention in Australia has been for tenants to fund fitouts through their landlords’ building owner incentives. Incentives include capital funding, which is a part of the rental lease agreement. Market and supply-demand conditions will affect the amount tenants can expect to obtain through incentives. During low-vacancy periods for example, tenants may only get 10 per cent in incentives and would need to make up the remainder of the finance themselves.
There are a few common funding options for businesses to partially or fully finance a fitout. Consider these five funding options:
Few businesses are in a position to finance an office fitout this way (or write out a cheque), but it is an option.
A special purpose debt line may be a good option for some businesses. However, the business' ability to borrow and get a secured loan is also a consideration, as an unsecured loan for fitout items could end up being quite expensive.
This is a good option for a standalone financing that suits the ATO self-assessment for depreciation rates of your assets. Self-assessing the ‘effective life’ of your assets may be a better choice if a client’s business/industry’s usage of assets is not typical.
Another good option for a standalone financing. Finance leases can offer positive features that enable businesses to maintain solid financial health and smooth operations over the long term. Here, the financed goods have a guaranteed residual value and the client will have the option to acquire the goods for that amount at the end of the lease.
Advantages here include:
- Intergenerational equity - tax deductions are the same throughout the finance lease period
- Long term options available, often 10 years-plus
- Leases can be fixed/floating rates
- Funding diversification is available through negotiation.
Watch out for this one. This is often offered under the pretence of an ‘operating lease’ with the promise that business will be entitled to off-balance sheet tax benefits. However, these rental leases don’t meet the ATO’s definition of a lease. Short-term rental finance, however, may be suitable on some office items.
Regardless of the finance methods you choose, it's important to be aware of potential risks and problems. Avoid these five funding fails:
- Not adequately considering the timeline and finance of the project. Sufficient time is needed to procure with the best arrangements. The funding also needs to be enough to cover interest costs as well.
- Relying solely on a finance broker for advice. Unfortunately, this can mean the funding terms may suit their funder commission arrangements more than the client’s needs.
- Signing onto a long-term rental for the fitout with the view that this will then mean the rental property comes under an equipment ‘operating lease’ and will classify as off balance sheet treatment.
- Keeping inaccurate and sloppy records of expenditures and missing invoices and receipts. This documentation is needed to show the ATO depreciation of the assets from the procurement costs.
- Getting finance for building works or office items that cannot quality for leasing. GST credits can be applied for lease agreements for goods that qualify.
Seek Independent Fitout Finance Advice
Relying just on one’s financier for fitout finance advice can of course be inherently flawed. Whether it be the client’s bank, finance company or lease broker, each are looking at the long-term financial gains they can make from the arrangement. It’s important that your client seeks independent advice and becomes informed of all options, considerations and possible consequences.
Fitout costs can have very significant economic and strategic effects on the business. Therefore, along with independent advice, businesses need to create a business fitout plan. Such a plan will clearly outline the budget, logistics, risk, cost, legal analysis, procurement methods, options and any possible financial/real estate initiatives as well as the fit out impact on the whole business.
Every fitout project has different requirements, budget and variables, as does every business. Some projects will be small, simple and able to be quickly implemented, and accordingly their fitout plan documentation may be very brief. For other clients, an appropriate fitout business plan will entail detailed analysis and evaluations and would need to be presented to many stakeholders to assess and select.
Whether the project is big or small, clients should ideally start fitout planning as early as possible in order to secure the best range of finance options and business success.