Commercial IP

From: Dale Gatherum-Goss


Hi

As you know, I've been looking for another IP for a little while now.

I'm currently looking at a commercial property on 1,604sq metres of land on a main Highway.

The deal (after some negotiation) is presently $320,000 with net return of $32,000 pa rent. The tenant pays all outgoings and so it is very cash positive. The tenant wants a 5 years lease with 3 further options to lease for 5 years each. Rent is to increase each by 3% or market values whichever is higher.

The land could be used to build 3 townhouses at a later point if the tenant decided to go elsewhere. This is unlikely given that he has been there for many years.

I'm looking to negotiate the price even more.

So, I'd appreciate any thoughts, feedback or advice on this deal if you have a spare moment.

Thanks

Dale
 
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Reply: 1
From: Manny B


Hi Dale,

the deal sounds good @ 10%, but check out if the purchase price is GST inclusive, as an investment property I was looking at the other day had a good price, but once I went through the paper work it stated that the purchaser needs to pay a further 10% GST. You may be able to get it back if u purchase it under a business name, but I thought I should just mention it just in case...

Also, in relation to town-houses, you will need to look at the zoning in that area & contact the local council to see if town-houses are permitted in that area (just worth asking if that is the avenue you would like to take down the track)...

Good luck & as you said, haggle a little more on price, they can only say no...

Cheers,

Manny.
 
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Reply: 2
From: Kippy :)


Hi Dale,

No comment/advice on the "good deal" or not side of things but just something to think about. Not sure if you are in NSW or not but if you are the 3% or Market Value idea may not be legal. Might be worth checking even if in another state.

RETAIL LEASES ACT 1994 - SECT 18 (NSW)
18 Restrictions on adjustment of base rent

(3) A provision of a retail shop lease is void to the extent that it:

(a) reserves or has the effect of reserving to one party a discretion as
to which of 2 or more methods of calculating a change to base rent is
to apply on a particular occasion of a change to that rent, or

(b) provides for a method of calculating a change to the base rent but
reserves or has the effect of reserving to one party a discretion as
to whether or not the base rent is to be changed in accordance with
that method on a particular occasion, or

(c) provides for base rent to change on a particular occasion in
accordance with whichever of 2 or more methods of calculating the
change would result in the higher or highest rent.

Sorry for the longish post. Hope it helps (or maybe helps someone else). Good luck with the deal.

Cheers
Kippy
 
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Reply: 3
From: GoAnna !


Hi Dale

How would the market value rent be set? Would CPI or another objective measure be easier to implement and more difficult to dispute?

Good luck! Sounds like a good deal.

GoAnna !
"Obstacles are those frightful things you see when you take your eyes off your goal."
-Henry Ford
 
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Reply: 3.1
From: Sergey Golovin


Hi Dale,

Subdivide, build three units - big one (warehouses) small one (small warehouse/office space) and take away shop at the front type shops/warehouses and relet the better one (with large block of land) to the tenant who is there now for smaller price as good will if you will. Only problem is your have to relocate him for time been or ask to come back later.

It is quite a puzzle.

Serge.
 
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Reply: 3.1.1
From: Dale Gatherum-Goss


G'day!

Thank you all for your thoughts and suggestions.

As the deal stands now, I like it. It is cashflow positive and will only get better by the time that I finish negotiating.

Importantly though, as Serge and others have cleverly suggested, there are options available to make good money from this property if the current situation changes and this also appeals to me.

As for the rent, I would rely on an appraisal from a PM to give me an indication and since it's then my IP, I could set the rent on what I think and force the tenant to prove otherwise!

Once again, thank you for all your thoughts and suggestions. I hope to make formal offer tomorrow.

Have fun

Dale
 
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Reply: 3.1.1.1
From: Phillip Monk


Kippy's comment about it being illegal to have more than one method of calculating commercial rent increases also applies to S.A.

Also, make sure your lender is prepared to let you borrow the extra 10% for GST before you sign anything. Make sure you've got all your tax invoices handy to substantiate your BAS. The ATO will want to see them before they part with $32K (or whatever) for your GST refund.

Just my 2c worth...
 
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Reply: 3.1.1.1.1
From: Robert Forward


Hehe, thats the way Phillip.

Telling an accountant to keep his records in order.

I wonder if accountants are like motor mechanics and look after everyone else first and couldn't be bothered with their own fixing up their own backyard....

Cheers
Robert
 
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Reply: 3.1.1.1.1.1
From: Phillip Monk


Dale,

Sorry, I had no idea you are an accountant. I wasn't trying to teach anyone to suck eggs! When I saw a post here about commercial IP I got all excited and felt compelled to add a snippet of info.

Something else that may be of interest to those contemplating commercial IP is that you may have to wait upto three months to get your GST refund, depending on when you settle in the BAS cycle. We settled on ours on April 12 so we had to wait until July to get our $22K back from the ATO. Ouchie.

I'm not trying to scare anyone off commercial (far from it!) but there are lots of little details to consider that don't come in to play with residential. Actually, I reckon one of the good things about commercial is that it is often perceived as being beyond Mum & Dad investors (which is all my wife and I are), which makes cash flow +ve bargains a bit easier to find.

Cheers,
Phil.
 
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Reply: 3.1.1.1.1.1.1
From: Robert Forward


Hi Phil

I wasn't being rude to you either. I just couldn't stop laughing though when I read your post.

Cheers
Robert
 
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Reply: 3.1.1.1.1.1.2
From: The Wife


Phillip,

SSSssshhhhhhh!! Stop promoting commercial property, or we will have ALL the posters on this site checking it out, do we need that? I dont think so :eek:)

Cheers, TW
PS, Where are you Phillip?, maybe we can cruise the commercial properties together, you and your wife, and me, 3 heads are better than one.
~Life is a daring adventure, or nothing at all~
 
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Reply: 3.1.1.1.1.1.2.1
From: Dale Gatherum-Goss


Hi Phillip!

Thanks for your thoughts, I do appreciate them despite what Robert suggested. Yes, I am a CPA and am aware of the issues that you raised - I'm usually the one telling everyone else these things.

I agree with your suggestions that the GST can be an issue.

Have fun and thank you for your help - keep posting regardless of who has asked for thoughts and advice.

Dale
 
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Reply: 3.1.1.1.1.1.2.1.1
From: Robert Forward


Dale

I wasn't saying you'd not appreciate the comments but would have a good laugh about it.

Cheers
Robert
 
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Reply: 3.1.1.1.1.1.2.1.1.1
From: Dale Gatherum-Goss


Hi Robert!

No problems. you'd be amazed at how many people try to tell me that I can claim a tax deduction for this, that and the other. It really is quite funny most of the time and often something that we can use to our advantage . . .

Importantly though, this forum is a great way for everyone to learn a little more about so many things and so I appreciated the comments knowing that they were meant well and that we benefited from them.

Have fun, Robert, I know that you add great value to this site.

Dale
 
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Reply: 3.1.1.1.1.1.2.1.1.1.1
From: Phillip Monk


Hi The Wife,

We're based in Adelaide - not your patch as far as I know. Never mind, I'd still be happy to see more discussions here about commercial IP. There are heaps of things I know I don't know about the subject yet, but I'm happy to share what I've learnt so far.

Cheers,
Phil.
 
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