With long leases, the opportunity for high returns and lucrative tax deductions on offer, commercial properties can be a sound investment choice.
Each property is unique, as will be any pre-existing leasing situation you enter once you purchase the property. So what do you need to know about buying a commercial property with existing tenants?
In this article, we will cover:
- What to ask yourself when making the decision to buy
- What to consider when buying a commercial property with existing tenants
- What happens and how does it work?
- Claiming depreciation with or without existing tenants
Making the decision to buy a commercial property
Before we get into the details of what happens if the commercial property you buy has pre-existing tenants, there are several key questions to ask yourself.
1. Is it the right choice for your investment strategy?
Your investment strategy fundamentally underpins your choice.
Commercial properties are unique, subject to different legislative requirements and standards compared to residential, while attracting a niche tenant market. Commercial properties generally provide a higher rental yield compared to residential, but this comes with a risk as looking for a niche tenant can cause the property to sit vacant for a period of time. If this is what you’re looking for, commercial investment could be a good move.
2. Is this a viable industry to enter?
Supply and demand aren’t the only factors to consider when purchasing a commercial property. The type of industry the property can be used for also feeds into the equation for example farming, manufacturing, hospitality and traveller accommodation.
The industry plays an important role in determining the type of rental rate you can expect and the feasibility of attracting tenants.
3. What’s your budget?
Depending on industry, property type and location, commercial investments can a substantial initial financial outlay.
While the long-term returns and consistent rental income can help with ongoing costs, ensuring the property is within your budget to begin with is crucial to avoiding any financial issues.
What to consider when buying a commercial property with existing tenants
The first step is to understand what you need the commercial property for. If you’re simply wanting to lease it to tenants at the market rate, then having existing tenants can be beneficial, it means you’re making a return straight away and a long lease is a positive.
However, there are situations where having an existing tenant isn’t ideal.
For example, if you’re wanting to occupy the property yourself to operate your own business. Or if the current tenant is on a prehistoric lease where the rental rate isn’t competitive in the current market. This is where buying a commercial property with an existing tenant can be less than ideal.
What happens if the property is already occupied by a tenant?
Essentially, purchasing a commercial property doesn’t allow you to dishonour a pre-existing, fixed lease.
The best option here is to seek legal advice prior to entering the contract of sale to understand the lease’s terms and any other contractual agreements. Understanding the fine print in the leasing contract is crucial as this will determine what you can and can’t do with the property once you own it.
The story changes if the tenant is on a periodic arrangement. This can provide more flexibility, allow you to make adjustments or end the leasing agreement following the set notice period. It’s important to note that this doesn’t simply mean you can do as you wish and it’s just as important to seek professional legal advice.
What happens if the tenant leaves and doesn’t remove fit-out?
In some instances, the tenant isn’t required to remove their fit-out at the end of their lease. If this happens to you, it can work in your favour.
Section 40-40 of Subdivision 40-B of the Income Tax Assessment Act 1997 indicates that if there is value in the assets left behind, the new owner of the property (you) becomes the owner of the assets.
Claiming maximum depreciation when buying a commercial property
Even if the previous owner had a tax depreciation schedule, it’s crucial to get your own. This is especially true if you need to do some work to the property as a process called scrapping allows you to instantly claim the un-deducted value of removed assets.
Several further factors also affect how much an individual investor can claim in depreciation including the settlement date, the industry the commercial property operates in under the new ownership and much more.
BMT Tax Depreciation can provide an obligation-free depreciation estimate in the early stages of buying a commercial property with existing tenants. This can help with your decision-making process and give you a better idea of the type of cash flow you can expect. To find out more about BMT’s commercial schedules and their other commercial services, call the team on 1300 728 726 or Request a Quote.