Increasing your returns and reducing expenses
Raine & Horne Commercial Southside is a specialist commercial property company that seeks to provide their clients with a complete range of services to ensure that their commercial investment performs to its maximum potential from purchase to sale.
A key component of this process is the active management of your asset during your time as owner and we have assembled a specialist team of experienced and dedicated commercial managers to ensure that you are provided with the best level of service and advice.
Increasing your returns and reducing expenses
A Commercial property is an investment and as with any investment its value will be judged on the profit generated for the investor.
There are exceptions to this rule, for instance when the value is linked to future development potential but these are relatively rare cases and it would be fair to say that given a reasonable location the higher the return the more desirable a property is as a long term holding as well as being more attractive to future purchasers or financiers
To achieve the maximum benefit there are a number of strategies that can be adopted and we have outlined a few of these below for your information.;
Choice of tenant – The choice of tenant will have a significant affect on the desirability of your investment as a key criteria for assessing any investment is to weigh up the potential risks against the rewards.
Simply put, what are the odds of the tenant paying the rent on time and regularly.
For example a favorite ploy adopted by a number of banks is to purchase a reasonable building in a high street location, establish a branch in the building and then sell the building with a long lease to themselves to an investor.
This arrangement generally obtains a premium at sale as with the long lease to a bank the future income stream to the investor is low risk and subsequently very desirable.(possibly not the best example to use these days in some parts of the world but never the less the principle is illustrated).
Fit out costs – assuming that you have a reputable tenant with a secure future and suitable lease term there are further opportunities to enhance your investment returns and increase the yield.
Generally a company make the decision to rent rather than purchases business premises as they wish to invest excess capital back into their business rather than into a property.
Relocating a business is expensive in itself but the cost of undertaking alterations or fit out works on top of this can have a significant impact on short term cash flow and profit for the company.
This provides the opportunity for the owner to consider undertaking these works on behalf of the tenant and in return they may recover the cost over the period of the lease (with a suitable interest allowance) in the form of a higher rental.
This arrangement will increasing the apparent yield, provide another investment return for the owner and additional benefit may be available from depreciation allowances (see below).
Depreciation - This fly’s under the radar with many owners and is often overlooked.
Indeed according to the ATO approximately 50% of commercial property owners that are eligible never investigate this avenue.
Effectively as the owner of a commercial property you may be able to claim depreciation costs against the income produced to reduce your taxable liability
Example - Assume an annual rental income of $100,000pa less depreciation for building and fit out at say $30,000pa provides a taxable income of $70,000 rather than $100,000K
These claims may be made under either or both Division 43 (the building) OR Division 40 (depreciating assets).
We recommend that you seek advice from your accountant in the first instance to establish if this avenue is suitable in relation to you taxation structure.
Should your investigations confirm that a depreciation arrangement will be of benefit we would recommend that a specialist consultant is commissioned to undertake an assessment and advise.
This is a very specialized area and the correct advice will pay significant dividends.
The initial schedule should be compiled upon purchase of the building but it is also worth noting that the schedule should be updated throughout the term of the lease whenever alterations occur e.g. fit outs or major plant items are replaced e.g. air conditioning plant.
It should also be noted that the depreciation allowance should be taken into account when purchasing or selling a building as it may have an impact upon the yield rate.
On selling of Electricity - In Queensland (please note this is not permitted in all states) the owner of a commercial property has the ability in some instance to on sell electricity to their tenants.
This can be a little complicated and is generally suited to larger power consumer but in basic terms the owner may establish a contract for the supply of power with a retailer such as True Energy, Origin etc.
This contract will guarantee a fixed cost in relation to usage unit costs for a period of time (generally up to 5 years).
The rate offered by the retailers is largely dependent upon on historic consumption figures i.e. The more power likely to be used the better price offered per unit
The owner may then settles the account directly with the retailer and is permitted to charge the tenant for their usage at a tariff cost set by the government.
The difference between the contract cost and the tariff rate is effectively profit and can in some circumstances equate to a considerable amount that again may have an effect on the yield provided by the property.
The risk associated with this is that power prices go done rather than up (would seem unlikely) and that sub metering may need to be installed if not already in place (multiple tenant sites only)
These are only a few of the strategies that may be employed to assist you with maximizing the return upon your investments.
Should you require any further information or assistance with the management of your property please do not hesitate to contact us.