When looking at a commercial property of any type, you need to spend time on the financial aspects of the property before you form an opinion about the price that you think that you can achieve. The financial aspects of the property can have a major impact on the price and or the interest of purchasers. The financial aspects of a building or a property can impact the asset for many years and, for this reason, must be analyzed and identified.
We have detailed some of the major aspects of financial concern in a property purchase or sale scenario. Whilst these are not the only categories of activity and concern, they are the major ones in most circumstances.
We recommend that you create a checklist from these items so that your property review and inspection process is suitably enhanced and professional, Page Papi.
The Asset Schedules: The property will contain many fixed and moveable assets. These will normally be detailed on the asset register. A well-maintained commercial property will have an up-to-date asset register for your review. Obtaining the asset register at the early stage of sale consideration is productive as it will tell you in detail what you are selling and later become part of the due diligence process.
Bank and Personal Guarantees: An investment property comprises leases and other documents which support tenant occupancy.
A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. This guarantee must have both strength and substance to reimburse the landlord in situations where the tenant defaults under the lease terms. At the time of property sale, these guarantee documents should have some form of ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord’s solicitor to identify the types of guarantees involved and the ease with which this can be achieved at the time of sale.
Capital Expenditure: Major items of plant and equipment that are replaced in a commercial property are usually regarded as capital expenditure and are separately itemized for taxation and depreciation over time. Taxation laws in your location will stipulate the depreciation terms as they apply to different types of capital expenditure. For example, a computer that is purchased for the building control system will depreciate far quicker than the air handling unit which was purchased for the air conditioning plant.
Well-maintained property records will include a detailed capital expenditure register and the date the capital item was purchased. Purchasers to the property will be interested in the depreciation that this register provides against the cash flow in the coming years.
Taxation and GST: Every country and property location has unique taxation laws and requirements relating to a property, particularly investment property. It is important to understand that these matters have been correctly handled and are up to date in the sale process. It is sometimes necessary to view the net returns for the property for the last few years that were applied to the taxation statements and lodgement process. You can also seek written confirmation from the property owner that all taxation matters are up to date.
Income and Rent Analysis: The income for the property reflects the leases and occupancy licenses therein. It is essential to understand that the rent has been collected by the leases or licenses and that all rental matters are up to date. A property with volatile leases or leases that are soon to expire will likely impact the price or the buyer’s interest. When reviewing tenant occupancy against leases, you should review the original documents and cross-reference this to the tenancy schedule and any discussions or information provided by the landlord. Part of this process will also involve checking the rent review profile and the expiry profile of all leases.
