First CIP Purchase
- Thread starter Trogdor
- Start date
Sure, I'm no expert on this topic, but did some basic DD on it before I moved on CIP.
I believe in a nutshell (happy to be corrected) that any property which is used to provide goods or services to the public and which also has rent approx < $1m pa would be covered under Act.
There are lots of requirements but the basic ones which caught my attention are cant pass on land tax, property expenses must be directly attributable to the property being leased (i.e. for a multi lease or strata you can only pass on costs of their part, or pro rata costs of the whole thing which in part benefit that leased property), you cant have a lease which specifies two or more methods for calculating rent which the method of selection of which one is left in landlord's discretion, etc...), prescribes how rental reviews work, specifies minimum 5 year leases (but this can and is often waived).
The easiest way to pick up on this is to read through both the Act as well as a standard form lease - you will notice many instances in the standard for lease where it says X will happen, then it will be followed with something like "(unless The Act applies)" - then if you trace it through the Act and commentary it will make sense. Or ask a property lawyer!!
Of course its still a world better than resi leases
http://www.legislation.vic.gov.au/d...d1228aa7faa19ef6ca256d56007f31b7!OpenDocument
(google search "effect of retail leases act (vic)" in google (or your applicable state!)
No Ratchets
Also, in addition to Trogdor's post above, there is no scope for ratchet clauses in a retail lease. If market review at end of lease term is less than current rent, it will not stay the same.....it may fall.
Although by what Trogdor has outlined in earlier posts and according to the diligence undertaken, an upward bias is being considered for rents in the CIP's future.
Congratulations and thanks for sharing
Also, in addition to Trogdor's post above, there is no scope for ratchet clauses in a retail lease. If market review at end of lease term is less than current rent, it will not stay the same.....it may fall.
Although by what Trogdor has outlined in earlier posts and according to the diligence undertaken, an upward bias is being considered for rents in the CIP's future.
Congratulations and thanks for sharing
Also, in addition to Trogdor's post above, there is no scope for ratchet clauses in a retail lease. If market review at end of lease term is less than current rent, it will not stay the same.....it may fall.
Although by what Trogdor has outlined in earlier posts and according to the diligence undertaken, an upward bias is being considered for rents in the CIP's future.
Congratulations and thanks for sharing
Thanks Player - very important point there about ratchet clauses - that slipped my mind.
Why would you think commercial would necessarily have a higher yield when the tenant pays expenses? Commercial 6.4% is roughly the cash equivalent to 8-9% on a resi, and the prospects for rental increases are much better for commercial. You can put commercial rents up 30 or 50% - or even more if the market's shifted enough, or rents have fallen below market - but try pulling that off on resi, even in a huge housing crisis.
And those rent increases flow through to increased value, which isn't necessarily the case with resi.
Because despite those two things, we still had a perception of a higher yield from commercial.
actually trgdor seemd to suggest it might also when he answered bv's query by saying it was due to being retail not commercial.....
Thanks for sharing and congrats !
I need to think about my next move... atm I have time to do it for a little bit at least (cause Im not a positon to buy right now, not cause of anything ore fortunate !)
I see what you're saying. I'd still say that net yield from commercial is higher. And as alluded to earlier, the great thing about commercial is the prospect of large rent increases, which can make yield on purchase price phenomenally high. (Just ask TPFKAD.
)And yes, I know, there's also potential for long vacancies, rent decreases, etc, but many of these risks can be managed with strong leases and comprehensive due diligence.
Thanks Trogdor,
This is very useful information. One of the reasons I have been hesitating with aquiring a commercial property is due to the review of loans - but the product above sounds like a more secure way of obtaining a commercial loan.
Much appreciated.
Regards Jason.
The only other thing I was thinking of was the no ratchet clause as Player mentions, and I think if your tenants are large retailers ??possibly you can add a % of their profits to the rent.
The lower yield would reflect the risk, he is saying prime retail, so securing a new tenant shouldn't be a big issue.
How old you btw troggy?
Regs,
RH
How old you btw troggy?
Regs,
RH
I see what you're saying. I'd still say that net yield from commercial is higher. And as alluded to earlier, the great thing about commercial is the prospect of large rent increases, which can make yield on purchase price phenomenally high. (Just ask TPFKAD.
And yes, I know, there's also potential for long vacancies, rent decreases, etc, but many of these risks can be managed with strong leases and comprehensive due diligence.
I was not saying it is not alredy higher.
And I certainly said nothing about vacancy rates etc, I'm not comparing/mocking this vs. resi in anyway
No worries, misunderstanding.
I know you weren't. I was just aware that since I was sounding so positive about commercial, there was likely somebody reading the thread (not you) who was ready to say "oh yes, but commercial has extra risks such as ..." and wanted to get in first.jaycee said:
No worries, misunderstanding.
I know you weren't. I was just aware that since I was sounding so positive about commercial, there was likely somebody reading the thread (not you) who was ready to say "oh yes, but commercial has extra risks such as ..." and wanted to get in first.
From my perspective at least, for what its worth, this type of CIP has less risks than resi.
I want to be able to live of rents & dividends at some point down the track - and feel that a sole resi strategy is a tough and risky way to achieve this goal. In the greater Melb region at the price point I'd want to invest in you are now talking 4% gross yields on resi, and <3% net. That has a lot of risk inherit in it - (a) length of time to go +ve, (b) possibility of lengthy periods of no price growth, (c) sheer amount of debt one has to use to obtain a portfolio whos net rents before interest would cover future living expenses once debt is paid off.
I know some others here go for high yielding resi, but for me lower end properties have their own risks, and managing 10 or 20 tenants and properties, plus maintenance on these, is a "scrappy" or "risky" proposition.
E.g. 4 x 500k inner melb units, $2m spend, $58k net rental return.
Or 10 x 200k "cheapies" = $2m spend, possibly $80 - $90k net return, plus hassle of 10 low end tenants, 10 x kitchens, bathrooms, etc.. to maintain.
Or 3 x c. 666k low risk retail / office = $2m spend, $120k net return. Each property would have little maintenance (small size, basically just a "shell"), and the only risk to manage is tenant risk / ensuring occupancy. Even if they were vacant 40 - 50% of the time I'd still be ballpark equivalent to resi!!
The way I see it I can aim towards 3 or 4 good quality retail properties in low vacancy areas, and in due course start re-financing these from resi equity and incrementally reduce interest costs then start to live off rents - and have a level of debt that can realistically be paid down / off in a reasonable period of time.
I think that's a really good strategy. The only thing you can't cover for is market/economic risk, where the retail sector is hit and you have a vacant property, isn't it??
What contingencies do you have in place in the event of vacancy?
eg. cash reserves/LOC's to cover 6-12 months vacancy.
I was aiming to have at least 6 months but ideally 12 months per property of rent (or interest repayments as a minimum) + outgoings, probably in the form of a LOC/redraw.
Was there a bond/bank guarantee/director's guarantee on your lease here?
Thanks.
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Thanks JIT. Correct, that is always a risk. I dont believe it is in this economy, but the last few years have taught us anything can happen - and if there was a severe recession then sure it is a risk.
But of course same think could apply to resi (to a lesser degree) as well, as well as shares, non-guaranteed fixed interest, etc...
Very good point.
Firstly - I wasnt 100% confident of my ability to pick a risk free investment for my first CIP and acknowledged my inability to control the economy. So have purchased this in a structure which sacrifices future income streaming potential in return for deductability of interest and any expenses. So in the event that the tenant goes bust I can support the interest indefinitely from salary + tax refunds. Have a DT with resi IP in it so will just recycle debt once accumulation phase is over.
Secondly - could go around a year's worth of holding costs in the event of tenant moving out and job loss from other sources (which has been run down to buy this, but #1 priority is to get this back over > 2 years worth asap).
Good idea!!
Not really, this is the weak part of the lease. Its only 1 months rent bank guarantee. I too-ed and foo-ed over this for a while as this seemed very light, but I was buying this property for its merits more than the lease in place and am very confident that I could find a tenant in a couple of months, so compromised on this point. Interestingly the very conservative valuation report noted that the property would be very easy to lease in 2 - 3 months with little or no incentives, and that there are no vacant comparables in the area.
Yes, it is a better time to invest in retail I guess... according to Mr. Harvey it is anyway!:
http://www.businessweek.com/news/20...ig-boom-billionaire-retailer-harvey-says.html
That was my next question! Fair approach.
From a financing perspective I am thinking of consolidating CIP loans with 1-2 lenders (when I actually buy one of course!) to try and get greater rate discounts, or even x-colling them if needed. Wouldn't plan to sell them anyway.
I think it's this sort of scenario where it helps to have your ''investor'' hat on, as looking at it from say a property lawyer/leasing perspective may give you a negative bias on the deal, but looking at it from a broader perspective in terms of timing in the market cycle, your overall investment and financing strategy, and the other merits/pros/cons you've elicited... you can make a better decision for yourself, as you seem to have.
It's like buying your first RIP and all your advisors telling you to put in subject to finance/building/pest etc... when you know your only chance of securing the property is a strong unconditional offer.
Exactly... One think this search has taught me is that when buying a tenanted CIP you are taking a lease which has been negotiated before you were on the scene. This results in having to think pragmatically. I did pull the plug on a couple of deals which had lease terms which I couldnt live with. Especially long term leases (i.e. one case was a 5 x 5 x 5 x 5 with around 13 left) which have terms which would be impossible to live with.
Yeah I heard the $5-$10M mark is where you want to be at, almost no competition as it gets rid of mums and dads and super funds but low enough you're not competing with insto funds. Applies to development sites too, knocks out all the local builders.
Yep, the main thing is that you're now in the game, and the rest of us here are still watching on the sidelines
!And when you do get vacancy and it's time to market and re-lease, you'll be in a better position to set the terms of the lease eg. by drafting your ''standard lease''.
