Before diving into the world of Commercial & Industrial Property, it is important that you understand the key terms and phrases that you may hear along the way. Here are a few to get you started…
Body Corporate
If you are purchasing a unit title property there will be a Body Corporate for the block. The Body Corporate consists of all the unit owners (or a representative of the owners, such as a Property Manager) who meet to make plans, provisions and budget for any maintenance, repairs or additions to the common property. The Body Corporate minutes will be recorded and can be made available upon request.
Capital Gain
Capital gain is the increase in the value of the property from your original purchase price.
Capital Expenditure
Capital Expenditure (also known as CapEx), refers to any works or improvements made to the property that fall outside the scope of repairs and maintenance, such as structural repairs or major building works. Capital Expenditures are separate from outgoings and cannot be passed on to the Tenant as an expense.
Certificate of Title (CT)
Certificates of Title (CT’s) prove the ownership of land. CT’s will also show any interests that have been registered over the parcel of land, such as a mortgage or a right of way. A CT will also include a plan or diagram of the specified land parcel. Please note that CT’s do not contain information regarding the value of the property.
Conditional & Unconditional Offers
A conditional offer involves submitting an offer with conditions attached that must be satisfied in order for the sale to proceed. Common conditions may be around receiving approval on finance, receiving a satisfactory building report or being satisfied after undertaking due diligence on the property. An unconditional offer is essentially the fully executed Sales & Purchase Agreement. When an agreement is unconditional and signed by both the parties that property has been sold. All properties won at an auction are bought unconditionally (unless specifically agreed otherwise).
Current Leases
If the property is Tenanted, the current lease will be made available for review. There may be multiple leases for one property depending upon the nature of the building and/or space. Current lease documentation will provide you with information, such as lease term and rent review mechanisms, that will allow you to develop your ownership and investment strategy for the property, ensuring you make a well informed purchase.
Due Diligence
An investigation of a property prior to the purchase to confirm any facts or relevant points of interest or concern. It is not uncommon for offers to be made conditional on the satisfaction of a due diligence investigation.
Earthquake Report
Seismic reports provide information of a building’s performance in a seismic event (i.e. an earthquake). These have become a significant focus after the Christchurch Earthquakes, with many lenders requiring reports on properties for the purpose of obtaining finance and insurers using reports to determine insurability and premiums. Tenants also have an increased interest in the ratings of buildings to ensure the safety of their staff and clients. There may be pre-existing reports, however you may wish to conduct your own during your due diligence.
GST
Goods and Services Tax (GST) is a tax of 15% added to the price of most goods and service in New Zealand. You may also be charged GST on the purchase of a property depending on your GST status. Rent and outgoings figures are generally charged to be ‘plus GST’ meaning you collect the GST on top of the expense. Please note, GST is not paid by Tenants entering Residential property.
Land Information Memorandum (LIM)
A LIM is a summary of information provided by the council that is held on a property and can include a wide variety of information including but not limited to; site contamination, floodplains that existing over the property (if any), storm water and sewerage drains and any special conditions imposed over the property.
Landlord
The Landlord is the party who owns the property. The Landlord may occupy the space or lease the space (in part or in its entirety) and collect rent off the Tenant. When selling a property, the Landlord is referred to as the Vendor.
Outgoings
Outgoings are expenses payable by the Tenants in addition to the rent payable on the property. The outgoings can include rates, utilities, service contract charges, repairs and maintenance and management expenses. Outgoings may be negotiated by the Tenant to exclude certain expenses where appropriate.
Property File
A Property File is obtained from the council and contains documents that are not included in the LIM such as; building and resource documentation and correspondence with the council regarding the property (note, if building work is unconsented there may not be information on it in the Property File). The Property File should be obtained alongside a LIM report. While Property Files are not necessarily obtained with every property purchase they an be a useful resource especially if you are purchasing the property with he intention of undertaking redevelopment of the premises or other significant building works.
Rent (Gross & Net)
When leasing a property Tenants will be required to pay rent; a fixed payment made at regular intervals (usually monthly) throughout the duration of the tenancy. There are two common types of rent; net and gross. Net rent is when the rental rate is exclusive of outgoings (i.e. outgoing are paid on top of your rent.) Gross rent is when the rental rate is inclusive of outgoings. In the Auckland commercial and industrial property market, net rent is the most prevalent rental structure used and is often preferred as it protects investors from fluctuations in outgoings affecting their bottom line.
Rights of Renewal
With rights of renewal, tenants have the right to renew the lease if they want to, or, alternatively they may let the lease expire without renewal. However, this does not mean that leases will renew automatically, tenants need to exercise their right by giving notice to the landlord. This is usually at least three months before the term of the lease is due to expire and. You will not be able to renew the lease if you’re not paying the rent. If you don’t give the correct notice to the landlord, you might lose your chance to renew.
For landlords, if the tenant provides notice of renewal and all of the conditions are met, they have to agree to the renewal of lease. If the notice expires and the lease is not renewed, then the lease shifts to being on a “month-to-month” basis. This is a vulnerable position for both parties, as either one could cancel the lease by simply giving 20 working days’ notice to the other.
Tenant
The Tenant is a party, separate from the Landlord, who through an agreement in writing (commonly a Lease) occupies a space owned by the Landlord. The Tenant will be contractually obligated to pay the Landlord rent and outgoings as specified in the Agreement to Lease and GST when applicable.
Vacancy
Vacancy is the term used when your property is not occupied. If you are a yield focused investor you will want to keep vacancy rates to a minimum. Throughout the period of vacancy, costs that may otherwise be absorbed as a Tenant expense (such as rates) will now be payable by the Landlord, these are commonly referred to as ‘holding costs’. Properties purchased with Vacant Possession are purchased without a Tenant, however these may be favoured by an Owner-Occupier or a Developer.
Yield vs. Capital Gain
These are the two common motivators for people investing in property. Yield relates to the income generated by the property (i.e. rent) and is often simply expressed as a percentage of the annual income received against the purchase price of the property. Capital gain is the increase in the value of the property from your original purchase price.
Zoning
Zones are areas that manage how land is used, developed and protected. Every property will have an underlying zone and this will determine what kind of business you can have in the space or what kind of development you can do on the site. Certain uses or developments may require a resource consent. While zones will commonly be consistent with the industry (use) of an area it is important to understand the relevant zone and any opportunities or restrictions that the zone may have.
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