there are leases and there are leases

Hi Alf,

Something that you wrote caught my eye and I thought it owuld be wise to flesh it out for all community members…

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I bought a torrens title townhouse in cbd adelaide about 2years ago off the plan. I furnished it so it was utilised as a service apartment this gave me building depreciation of 4% and not 2.5%…

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Having researched this in more detail, here’s what I have found…

The normal building income-producing building write-off is 2.5%, but because you are offering short-term traveller accommodation (ie. serviced apartment), you are allowed a 4% write-off.

Of course, you are not entitled to a bigger deduction over the life of the project, just a quicker deduction (over 25 years rather than 40 years).

Now your furniture is outside of this building writeoff deal – as it is a fixture and fitting and not part of the capital structure. Furniture is usually depreciated in five years or less.

As for your deal…

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This larger company is offering us a more comprehensive lease that ties the property up for about 20 years 5+5+5+5 at the end of each term they chose whether they want another term (if they do you have to give them the right of the next term). They are responsible for a signifanct part of the outgoings and management of the property. The catch is that you hand over the furniture to them for one dollar if they chose to go another term. There argument is that one has depreciated the furniture so it costs the owner nothing.

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Yeah – seems like a creative deal, to be sure. You need to weigh up the risk vs. reward, but I’d probably go for it depending on the value of your furniture. A couple of questions in the back of my mind though are:

1. Do you have to replace the furniture every 5 years?
2. How good is the reputation of the coy behind the rental guarantee?
3. Are there any restrictions on you selling it?
4. How are rental increases handled?
5. How are the units booked and what is the penalty for vacancies and strategy for attracting clients?
6. What are the management fees?

You could always go 4 out of the 5 years and sell it in the 5th year to somebody else who probably won’t be careful enough to read the fineprint in the lease and it will become their problem.

Having said that – watch out for a company that ties up management of the place but has a relaxed marketing policy about actually renting them, or worse, if they own the majority of units and have a policy of renting theirs out first and leaving yours vacant. It’s been done before by some dodgy folks in Qld!

Bye,

Steve McKnight