Head Leases

[Mamaof3]

I've googled and haven't found much info so hoping SS forumers can assist with this question!

We've got a group of residential units currently under construction. Someone has expressed interest in taking a head lease over the units (these are purpose built student accommodation units) and have asked for the rent and terms however, this is the first time we've dealt with a head lease scenario so not really sure about a few things.

Term wise we were thinking along the lines of 5yrs with an option to renew for a further 5?? That a reasonable term?

Rent wise, by them taking on a head lease would i be correct in assuming they are looking to make a margin on these units so we shouldn't be asking for market rent otherwise they'll have no room to move and wouldn't be worth their while?

Also in relation to the rent, anyone know whether gst will be applicable and whether the rent can be increased along with the cpi each year?

As you can probably tell i'm completely clueless and just looking for some feedback from those more experienced in this type of thing. Its residential security but commercial terms so its confused the heck out of me as i have never dealt with any commercial stuff before.

Any advice much appreciated! Have contacted a couple of PM's and awaiting their feedback also...haven't heard back from any so hoping SS'ers can comment on anything that may help?

Thanks in advance!!

 

[moyjos]

Talk to a solicitor, but I would say make them sign a comm lease , not a resi lease.

They are renting commercial premises (the whole block) to run a business from (individual beds).

GST depends on if you are registered or not (if the turnover from this is over 75k, then yes you would have to be gst registered and charge gst on the lease.)

As a commercial arrangement, the tenant would be responsible for maintaining the units and for outgoings. Yes factor in a rise every year (CPI plus a little bit)
You could possible also get a security for 6 months rent.

Good luck..you might have a good deal on your hands...rent coming in and you not having to look after individual tenants.

 

[Mamaof3]

Thanks for your reply Moyjos!

Yeah it looks like it could provide us with a 'set and forget' type deal as the alternative would be for us to rent them out individually ourselves which is a whole lot more work.

If this head lease eventuated, does a commercial PM prepare the paperwork (lease agreements etc) or a Solicitor?

 

[moyjos]

Definitely a solicitor. And a good one.

A solicitor that deals with management rights might be the go. Have a look in the phone book and see if you can find the name of a couple of larger body corporate managers and see if they might recommend a solicitor .

 

[Mamaof3]

Cool, thanks!

Appreciate the reply

 

[chilliblue]

Agree with the advise above but do not give them any options. If they insist, increase the initial rental and ask for notification of not taking up the option 12 months prior.

 

[Mamaof3]

Just following on from my initial post....have had further discussions with another major university regarding them taking on a head lease and they said that they would but would only do so if the rent was 75% of market rate.

I haven't ruled it out because i'm thinking it might still be workable provided the terms and conditions are favourable.

Any suggestions as to what terms you would put in there which may make it worthwhile to consider given the rent is 25% below market rate??

I'm thinking the term of the lease (the longer the better) would be one thing but thats about all i can think of! Suggestions would be much appreciated!

Cheers!

 

[moyjos]

I wonder if you can get your hands on a Defence Force house lease. The do all sorts of things to the property, (so you could argue that there is precendent)

At regular intervals the property must be repainted, recarpeted etc.
Similar improvements might be in place in your units. The Uni would surely want to keep them up to date in terms of being able to get market rent for them.

Did you find a solicitor yet?

 

[moyjos]

Just another (scary) thought..... how are these units financed??

If you go the head lease option, I wonder if your bank might suddenly decide that it should be a comm loan and hit you up for some $$.

 

[Mamaof3]

Acutally Mum & Dad owned a Defence Housing property so i might go looking for that because you're right, they do like to maintain their properties by repainting, re-carpeting etc. Thanks for the suggestion!

Its currently going through a private lender but once they're complete we're going to try and get them refinanced through resi...but you're right, mainstream lenders will probably try push us towards comm.

 

[Dazz]

repainting, re-carpeting etc.

....and you think that is a fair trade-off for giving away 25% of your rent every week....not that the Uni has even offered to do any of those things as yet by reading your posts ??

I haven't ruled it out because i'm thinking it might still be workable provided the terms and conditions are favourable.

Of course, by definition, the word favourable would only apply when the terms and conditions applied were worth more to you than 25% of the gross rents foregone.

Of course, your much larger Head Tenant will also be looking for 'favourable' terms and conditions, which by definition, will be agreeing to do things that constitutes far less expense than the 25% of the rent they are skimming.

How do you think you're going to go up against an organisation worth a couple of hundred million, cutting property deals all the time ??

 

[Mamaof3]

Actually after doing some quick numbers it was clear the 25% reduction in market rent equalled a ridiculously low rent but, i've worked out if i can apply a different appraisal approach (instead of the normal market rent of the units, i'll get an appraisal for a $$/room figrure so that by the time the 25% reduction is taken into consideration, the rent received still equates to 'normal' market rent rates if that makes sense.

Still lots of things to work through but it is clear that the rent discount is not worth considering because we'd be losing out on like $50K/year in rent with the discount.

 

[geoffw]

Might an NRAS deal be applicable? I don't know the details, but the government give you a subsidy in return for providing accommodation at below market rent. If it were applicable it could be quite worth it.

 

[Mamaof3]

Not sure if the NRAS is applicable for specialised securities such as student accomodation but from what i've read in the past about the program, it doesn't appear that it does include it.

Having said that, the NRAS has already secured its next lot of homes for the program (have to apply like a year in advance or something) so we would have missed out regardless.

I will ring them to double check now that you've mentioned it just to make doubly sure whether we would qualify or not. Thanks!

 

[CarolInPerth]

Not sure if the NRAS is applicable for specialised securities such as student accomodation but from what i've read in the past about the program, it doesn't appear that it does include it.

Having said that, the NRAS has already secured its next lot of homes for the program (have to apply like a year in advance or something) so we would have missed out regardless.

I will ring them to double check now that you've mentioned it just to make doubly sure whether we would qualify or not. Thanks!

NRAS does include student accommodation. Maybe there is a consortium with credits to spare that could transfer them to you - for a price. Just thinking aloud.

 

[Mamaof3]

Yes you're right guys/girls, NRAS does apply to student accommodation! Yay for that so first job tomorrow morning is finding out how i can get into it. Thank you!

 

[Mamaof3]

NRAS does include student accommodation. Maybe there is a consortium with credits to spare that could transfer them to you - for a price. Just thinking aloud.

Thats a really good thought! I'll remember to ask NRAS if this is a possibility when i speak with them tomorrow!