More Vital Accounting Tips For Commercial Property

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AS COMMERCIAL PROPRTY investors, managing finances can be one of the most important aspects of ownership. No matter how many buildings you own, you still have to run your business and finances accordingly. [Read more…]

You Need to Look Behind The Economic Data

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A NUMBER of journalists and economic pundits seem to have been focussing solely upon the latest GDP figures.

However, the recent NAB monthly business survey appears to contradict concerns about the shaky household consumption sector – where the main concerns seem to relate to past issues.

Mainly things like … the end of the mining boom, resulting in a collapse of wage growth. [Read more…]

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…]

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.