Commercial Loans With No Financials – Is It Possible?

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TRADITIONALLY, for any business or commercial loan, most lenders will require at least two year’s past tax returns and financials to establish servicing capacity.

For some borrowers, this is either not desirable or not possible. And so, here is a summary of several loans that could be available for such a borrower; plus how those loans may also apply to you, as a commercial investor. [Read more…]

4 Tax Tips for Commercial Property Investors

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AS THE END of the financial year approaches, commercial property players should know their tax implications – especially first-time commercial property investors, who need to be aware of the key differences for owners and tenants. [Read more…]

Removing Budget Confusion Over Claiming Depreciation

THE 2017 FEDERAL BUDGET (handed down by Treasurer Scott Morrison on Tuesday 9 May) includes proposed changes, which will affect residential property investors Australia-wide.

At this stage, our understanding is that depreciation claims relating to commercial properties won’t be affected. This is good news for anyone who owns a commercial property. [Read more…]

Underquoting Laws Change

UNDERQUOTING can take place whenever a real estate agent misleads a potential buyer about the likely selling price of a property – be it for commercial or residential real estate.

For example: When a property is promoted at a price that is lower than its estimated selling price, the seller’s asking price or at a price that the seller has already rejected. [Read more…]

Understanding Total Returns


ONLY RECENTLY, I shared some thoughts with my Mentor group. And they related to the Total Returns investors tend to expect from commercial property.

Here is a graph that appeared late last year in the Australian Financial Review. And it depicts the combination of Income Return and Capital Growth. [Read more…]

Depreciation Can Be a Cash Cow for Farmers

MANY COMMERCIAL PROPERTY investors will also own a rural property. However, they are often not taking advantage of the same depreciation benefits claimed for their investment properties. Did you know that …

You could claim $149,187 from your rural property?

The most recent Commonwealth Bank Agri Insights Report suggests that investment in Australian rural properties remains strong.

The report revealed that investment intentions have strengthened among cotton, beef, lamb, summer grain and wool producers, while horticultural investment intentions are at their highest level to date.

Adding to the expected increase in production, the report projects that a significant proportion of farmers intend to spend more money on items used on their properties. 25% of those surveyed nationally plan to purchase plant and equipment items, while 38% planned to spend on fixed infrastructure.

While BMT Tax Depreciation experienced substantial growth in the number of depreciation schedules requested by agricultural property owners over the past two financial years (a 36% increase during 2014-2015 and a 51% increase during 2015-2016), many farmers are still failing to consult with a specialist Quantity Surveyor to ensure their claims are maximised.

Given that farmers can experience times of financial hardship (particularly during droughts, floods or fluctuations in the price of goods being sold) the additional cash flow that depreciation claims can deliver to rural property owners is often vital.

 Here is an example …

To demonstrate the difference that depreciation claims can make for farmers, we looked at how BMT helped the owner of one dairy farm.

The farmer purchased a property for $1.75 million and on settlement they requested a depreciation schedule. A detailed site inspection completed by our expert team discovered they could claim deductions for the assets outlined in the table.

The table also shows the first full financial year deductions the dairy farmer could claim.

In the first full financial year alone, BMT found $149,187 in depreciation deductions for the assets listed.

As a dairy farmer, you are also entitled to claim additional capital works deductions for the barn and a homestead.

In total, the owner of a typical dairy farm with these assets and structures could expect to claim between $850,000 and $1.1 million over the life of the property.

Incentives outlined in the 2015 budget for primary producers mean that farmers are entitled to write-off a number of assets immediately.

This includes fences, dams, tanks and irrigation channels. However, the Australian Taxation Office does stipulate additional rules if owners are depreciating second-hand assets.

Bottom Line: As you can see, it’s vital to seek expert advice and to obtain a comprehensive depreciation schedule to ensure deductions are correct and maximised based on the individual circumstances and requirements of the property owner.


4 Steps to Finding Your Ideal Commercial Finance Facility

IN MY EXPERIENCE, most seasoned property investors seem to have a good idea of how to structure a home loan and what to look for.

However, the complexities of commercial property and the wide array of commercial loan products mean it can be a little more difficult for commercial investors.

As a result, many get trapped in loan products that are not appropriate to them, which can be very expensive.

What followings will help lay out some steps required to ensure you are making the right decision with your commercial loan product; and, at the same time, avoid the costly mistake of going into a product that doesn’t suit your needs

1. Determine your plan for the property

The right commercial finance option should be consistent with your future investment plans. And therefore, you first need to figure out what you want out of the investment, before looking for the finance solution – rather than the other way around.

Perhaps some questions to ask yourself might include:

  • Do you wish to hold your investment for the long term or just for a period before selling?
  • Are you an active investor who regularly buys and sells or a passive investor who will look to slowly acquire?
  • Are you wanting to be aggressive or conservative?

2. Prioritise your loan requirements

Once you have a good idea what your investment plans are, you can then decide what your main priorities are.

For example: If you are wanting maximise return on equity and have an aggressive growth strategy …having a higher loan to value (LVR) ratio for your investment may be more important, than obtaining the cheapest facility.

Furthermore, if you are looking at a long term hold strategy, a longer loan term may be preferable to a shorter term – even if this means a higher interest rate.

3. Consider Your Circumstances

While you have a wide range of products available, most loan applicants are able to obtain funding – provided they have sufficient equity and the property is acceptable.

Commercial loans are generally priced for risk – which means the riskier the transaction, the higher the pricing.

When you consider your strategy, it is useful to have some awareness as to where you sit in terms of risk profile. If you are pushing the envelope with debt amounts or security type, your priorities need to be more aligned with finding the facility that suits.

On the other side of the coin, if you are a high net-worth investor with a low risk transaction … you may have significant bargaining power to obtain the most attractive terms you can. And it is advisable to make sure you ARE getting the best terms possible.

4. Get the Right Advice

As a commercial property investor, the terms can be a little more complex. So, it is important you have a competent team around you in the area of tax, legal and financial advice.

A commercial credit advisor can assist with tailoring the right loan product and structure to suit your investment goals.

However, it is important your borrowing structure is set up correctly from the start.

Bottom Line: Your financial structure is just like a chain … where any weak links can be very costly. Therefore, it is well worth the time, effort and money to obtain good advice before investing.

Going through the above steps will go a long way towards ensuring that you choose the right commercial loan for you.


Common Property Deductions for Commercial Strata-title Owners

AN ESSENTIAL PART of ensuring commercial property owners claim the maximum depreciation for their property is taking advantage of any common property deductions which may apply.

Owners of all types of commercial property owners are entitled to claim deductions for the wear and tear that occurs to the building and its fixtures. Depreciation deductions fall under two classifications:

  • Capital works deductions (division 43) for the building structure
  • Plant and equipment deductions (division 40) for the easily removable or mechanical fixtures and fittings found within the building

If a property such as an office suite, industrial unit, or warehouse in a multi-unit complex is purchased in a development controlled under a strata-title body (or a strata title scheme), additional depreciation deductions will apply.

This is because owners are entitled to claim a portion of the depreciation for structures and assets contained within the common, shared areas.

Australian Taxation Office Tax Ruling 2015/3 provides clarification as to how common property is treated for tax purposes including detailed definitions of the types of strata-title ownership, which are deemed eligible.

Common property areas and shared infrastructure in commercial buildings which may result in additional capital works deductions for owners who purchase a lot in a strata title building include:

Some examples of plant and equipment assets found in common areas of commercial properties which can be claimed as a depreciation deduction include:

It is important to note that owners can only claim common property deductions for their portion of interest in the structure and assets contained. This is determined by their individual unit entitlement as per the strata plan.

However, when claiming plant and equipment assets, the deductions can be quite substantial, particularly as depreciation rules (such as immediate write-off and low-value pooling) can be applied.

The following table provides examples of the deductions BMT Tax Depreciation found for the owners of two commercial property types purchased via a strata-title arrangement.

Bottom Line: Apart from engaging a Tax Depreciation specialist, investors considering purchasing a lot within a strata-titled commercial building should also seek professional advice from their Accountant and Solicitor.


The 11 Benefits of Investing in Commercial Properties 

INVESTING IN Commercial properties is not the same as investing in residential property. There is a completely different set of dynamics driving commercial properties, when compared to residential.

Here, we’ll discuss the 11 Benefits of Investing in Commercial Property — among them being those also related to Accounting issues.

1. Rental Returns

The rental return for owning a commercial property is generally better than residential property and is easier to achieve a neutral return.

For example, you can generally achieve a 6% Net annual return, whereas residential properties would only achieve a 2% to 3% Net Return — after deducting all the other costs such as council and water rates, repairs, land tax and so on.

2. Renting an Business location Vs owning one

If you have a business and you are leasing an office, you’d be better off by buying your factory or office through your Self-Managed Superannuation Fund (certain conditions do apply). Instead of paying rent to the landlord, you can effectively pay that rent back to yourself via your SMSF.

3. Taxation Benefits

Rent paid by your company is tax deductible at 30%; and when it goes into your SMSF it’s only taxed at 15%. Capital gains are only taxed at 10%.

4. Contribution Limits

Where there is a limit on how much you can contribute into your SMSF as your Super contribution, there is no limit on how much rent you can pay — as long as the rental price is within market rates.

5. Depreciation value

Commercial properties have much more generous depreciation rates than residential properties. This makes them extremely tax effective.

6. Tax-Free Return

If you want to earn $200,000 a year (completely tax free), just buy a commercial property that has $200,000 in depreciation. Effectively $200,000 of your received rental will become tax free.

7. Leveraging your Commercial properties

The ability to leverage your assets via the use of debt is an extremely effective strategy.

Example: You have $200,000 cash deposit and you could borrow $400,000 at an LVR of 67%. This means you can buy a commercial property at $600,000. You now have $600,000 working for you instead of $200,000.

Assume

  • capital growth is 5% pa;
  • rental return of 6%pa; and
  • an interest rate of 5%.

In very broad terms, the rental basically covers interest (neutrally geared in this example); and if you achieve capital growth of 5% ($30,000 pa), you are able to achieve a 15% return on your cash of $200,000. ($200,000/$30,000)

Caution: Some properties do not achieve any capital gain, including some residential properties. It’s all about your property selection.

8. Property Leasing Options

Tenants are generally businesses and they prefer to sign long-term leases such as 5+5 years. Meaning, it’s signed for 5 years with an option for another 5 years.

9. Commercial Property Leasing Terms

Most leases require the tenant to pay all outgoings; so the landlord receives a NET rental.

10. Percentage of Rental increase is tied to the Capital Growth

Many leases have clauses that gives the landlord an automatic rental increase of 4% pa (or CPI) whichever is the higher. This means the capital growth of the property is also tied to the rental increases.

11. Commercial Property Valuations are far more clinical

In the main, they are closely tied to the rent.

For example:

  • If the rents were $60,000 pa and the market was paying a 6% return on investment, it then simply values the property at $1m ($60,000 divided by 6%).
  • However, if demand for the property were strong and investors willing to accept a 5% pa return, the property value would be worth $1.2m ($60,000 divided by 5%).
  • If rents reduced to $50,000 pa and assuming a 6% return is expected, then the property would have reduced in value to $833,333 ($50,000 divided by 6%)
  • If rents fell to $50,000 and returns dropped to 5% pa, then the property value would increase to $1m ($50,000 divided by 5%).

Bottom Line: As you can see, Commercial property offers you a wide range of benefits. Plus, it is also far less emotional than residential property — which is mainly valued using comparable sales.

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

WARNING: Your Land Tax Objections for 2017

THIS IS A REMINDER to Review your Assessments and Object before the 60-Day Deadline expires very soon.

As you may well be aware, the State Revenue Office is currently issuing 2017 Land Tax assessments for Victorian landholdings owned as at midnight on 31 December 2016.

These land tax assessments are based on local council valuations as at 1 January 2016 and from our preliminary review of a number of assessments, site values have increased substantially between the 2014 and 2016 revaluation dates.   This has obviously led to significantly higher land tax assessments for landowners.

If you are wanting to object to these assessments, you must do so within 60 days of receipt of the assessment and generally, no extensions to this date are possible.

Each year, HWL Ebsworth prepare a number of objections to land tax assessments and also prepare applications to VCAT where the SRO disallows objections which are made.  We also have relationships with leading valuers who specialise in land tax objections.

Bottom Line: Please contact me if you would like some help with this process … to ensure your objection is prepared properly, with the best chances of success — as the potential savings across your property portfolio could be substantial.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.



6 Tips for Commercial Property Owners in 2017

AS WE ENTER February, many investors are now implementing their annual New Year’s resolutions.

Commercial property owners often think about the ways they can reduce the costs of owning their property and running their business. However, when they do so, the deductions they can claim via depreciation are not always top of their list.

Many commercial property owners still do not maximise the depreciation deductions available from their commercial property, so this is a very good reason why they should add requesting a tax depreciation schedule to their annual resolutions for next year.

Claiming depreciation from commercial properties can be quite complicated.. There are many factors to consider which can easily lead to incorrect claims being made and deductions not being maximised, particularly when property depreciation is involved.

To assist the owners of commercial investment properties, here are six tips on property depreciation to consider in the New Year:

1. Pre-1982 Commercial property is not too old to claim depreciation

Both new and older commercial properties will attract some depreciation deductions. It is a myth that older properties do not attract a claim.

Although the Australian Taxation Office (ATO) places restrictions on claiming capital works deductions (depreciation for the structural element of a property for example roofs, walls and floors) there are no date restrictions for claiming depreciating plant and equipment assets.

The ATO advises that the owner of any commercial property in which construction commenced after 20 of July 1982 can claim capital works deductions.

Depreciation deductions for plant and equipment assets are calculated based on the individual effective life for each item set by the ATO.

Deductions for plant and equipment are also dependent on each assets condition and quality. As these items are rarely the same age as the property, generally having been updated over time, there are often significant deductions available to the owner for plant and equipment depreciation claims.

2. Claim renovations done by a previous owner of the property

Any renovations completed to an investment property can also be claimed, even if they were completed by a previous owner. This includes items which may not be obvious. For example new plumbing, water-proofing or updated electrical wiring.

For capital improvements of a structural nature to qualify as capital works deductions, the renovation must have commenced within the qualifying dates set by the ATO.

Recently installed plant and equipment items are also likely to receive higher depreciation deductions due to the increased costs involved in purchasing and installing these assets as well as the condition the assets are likely to be in when a specialist Quantity Surveyor makes their assessment.

3. Both tenants & owners can claim depreciation for any fit-out

Commercial tenants are able to claim depreciation for any fit-out they add to a property once their lease commences. This includes items such as desks, blinds, shelving, carpets, vinyl, fire fighting equipment and security systems.

If lease conditions mandate a tenant return the property to its original condition, they may also be able to claim a write-off for any remaining depreciable value available on scrapped assets.

This 100% deduction must be done in the same year as the item is removed from the property.

Any assets a tenant leaves behind after the tenancy has ended can also be claimed by the commercial property owner. Deductions for fit-outs can become very complicated, so it is important to consult with an expert.

4. Don’t wait if you have only just purchased a property

Often commercial property owners will wait until the next financial year to claim depreciation deductions if they have only just purchased a property. However by doing so, they could miss out on valuable cash that can be particularly beneficial after outlaying substantial funds to secure the property.

Specialist Quantity Surveyors use legislative tools, for example immediate write-off and low-value pooling, to make partial year claims more beneficial to property owners.

It is worth consulting an expert to find out what claims are available. Commercial property owners can also claim the tax depreciation schedule fee straight back in the same financial year if they arrange the schedule before the 30th of June.

5. Previous years tax returns can be adjusted

If a commercial property investor has not been maximising their deductions and claiming depreciation, the previous two financial year’s tax returns can be amended. A tax depreciation schedule can provide the details of any deductions missed for a commercial property owners Accountant to make a claim.

6. Get an expert to assess the property and perform a site inspection

To ensure that the correct deductions are claimed, make sure to speak with a specialist.

Quantity Surveyors are one of the few professionals recognised with the appropriate qualifications to estimate the construction costs of a building for depreciation purposes.

They will inspect the property to make sure every plant and equipment asset is identified and that claims for fit-outs are correctly noted for both the building owner and the tenant’s claim.

These Depreciation schedules make the process easy for both the owners, tenants and their Accountants to claim the maximum deductions possible for each party.

Bottom Line: Commercial property owners can get a free tax depreciation estimate by using the BMT Tax Depreciation Calculator. The calculator is available for online or to download as an app by clicking here.