What happens once you’ve Gone Unconditional?

THIS IS NOT THE TIME to simply sit back, relax and wait for settlement. There are several things you still need to do.

The first item is Attending to Finance

As you’ll appreciate, every Commercial property investor wants to know how to gain the upper hand, when dealing with the banks.

All too often, I have heard from investors who have chosen a top property and negotiated a great deal … only to watch the whole thing unravel – just because they didn’t pay close attention to how their finance should be arranged.

Remember, in an earlier article we talked about pre-valuing the property. And the reason was that we could establish a figure up to which a valuer would support.

This is to give you comfort so that you could sleep at night. But now you are arranging your finance.

Therefore, if a recognised valuer will support it, that is the figure against which the banks will ultimately lend.

Before signing the contract, you would have already spoken with a finance broker, who would have given you a good idea of what was involved; plus indicative approval from several lenders. And that would have been based on the price of the property, its rental income and your financial standing.

Traditionally, the way it works is that you exchange contracts, you then take the contract to your bank, who organises a valuation. Then hopefully, you proceed through to settlement and everything is fine.

What we found (and this goes back to the early 1990s when I began acting for purchasers) … was about 3 or 4 weeks before settlement, the lending officer would tell us that “the credit committee had become a little nervous”. And this was happening because things were rather tough in the early ’90s – as they might become once again.

Anyway, the committee were asking for a lien over your home, your business or just needed some additional form of security.

As you can appreciate, 3 or 4 weeks out from settlement, you are really caught in a bind. And there’s nothing you can really do, other than reluctantly agree to it.

When that happens once, you sort it out. When it happens again, you fix it permanently.

The Solution

The arrangement I have with the Valuer (who provides a figure in advance, to give you comfort before entering into a contract) … is that when my clients who exchanged contracts, they will instruct him themselves – to carry out the formal valuation based on the contract price paid.

And as the contract price is no higher (ideally lower) than what the valuer was prepared to support … the formal valuation will match the contract price.

The valuer prepares the valuation and provides a soft copy to the finance broker. And even if you have a favourite source of finance, the broker circulates this soft copy to your source and a couple of others – in order to obtain you the best outcome.

You see, the unspoken implication to the lenders is … they now have competition – and had better come up with a good proposal.

Therefore, not until you are happy with both the commercial (and also the legal) terms of the loan deal … do you decide upon your chosen source of finance.

And if (for whatever reason) someone pulls a swift one, you can quickly revert to your second best choice – because you own the valuation, and hold the trump card.

Clearly, the formal valuation is common to every transaction. All I’ve done is swap the ownership – therefore, the control. And not until you are totally satisfied with the deal, do you ask the valuer to assign the valuation across to the lender.

Most investors go cap in hand the banks for the finance, and believe the banks are doing them a favour. However, you need to view it other way around.

You are the one who holds the asset; you are the one bringing business to the bank; and therefore, you are the one who should remain in control.

Hopefully, that is now making more sense.

Your Claim for Depreciation

The second thing you need to arrange this a detailed Tax Depreciation schedule.

During an earlier article, we mentioned taxation benefits should not be the main reason for anyone purchasing an investment property. Nonetheless, those tax benefits can certainly improve your bottom line.

A lot of investors do not fully understand depreciation and how you can benefit from it. As a result, many investors feel that older buildings don’t have very much left to depreciate.

However, there are still two components available for you to depreciate.

One is the structure of the building called a Capital allowance, or Division 43 allowance. And there is also accelerated depreciation, for what is called Plant & Articles under division 40.

These include things like carpets, fittings and air-conditioning units. And unlike residential property, there is generally a lot more of those to depreciate in commercial buildings.

The  Process

The first thing a quality surveyor does (when you purchase a property) is deduct the value of the land … to arrive at the value of the property’s various building components.

Under the ATO guidelines, the quantity surveyor then establishes the value of the Structural aspects of the building – based upon the original cost of construction.

Therefore, by subtraction, the current-day value of the Plant & Articles is thereby established. And this is the figure you get to depreciate at an accelerated rate.

So, even though the Plant & Articles might be 10 years old, they are effectively up-valued (for the purpose of depreciation) relative to the price you pay for the property. And because this is a little known fact, you need a quantity surveyor to undertake the full assessment.

You need to appreciate that your depreciation claim is a non-cash deduction for you – but it goes straight to the bottom line. That’s because it reduces your taxable income and therefore, improves your overall return.

Although, there is one thing you do need to be wary of. And this is … ensuring the contract of sale is “silent” as to the written-down value of these Plant & Articles.

If vendors are alert, they will have a schedule it in the contract specifying the written-down value all these items. And if that is the case, you then have a problem. Because, you can only depreciate from the point at which they have been written down to, and you just continue depreciating from there.

However, if you buy a property and the contract is silent, you have the right to up-value these items relative to the price paid for the property as a whole.

Technically, vendors should then pay the ATO what is called a “balancing charge” – being between your new figure and the current written-down value of those items.

In Summary …

Obviously, as I am acting for you … I’m not about to tell vendors of the exposure they have. However, when the time comes for you to sell, you need to include a schedule of written-down values in your contract of sale – in order to fully protect yourself.

So hopefully, this gives you clearer understanding of what needs to take place, once your contract has gone unconditional.

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