Leasehold Commercial Property questions

Hey Everyone, long time reader, first time poster here
I have had a commercial property opportunity come my way, great yield 9% +, Great Location, Good tenant, long history in the location with a good lease too.
My hesitation is that it is a leasehold not a freehold property.
Any one purchased a leasehold property in the past or have any information that may help with this opportunity?
Are there any pros to a leasehold? etc..
Any info would be great, as im finding it difficult to find much info online regarding this
Thanks in advance

 

Being leasehold, you only have the balance of the lease term as your time to earn a return on the investment. The value of your lease decreases the closer it is to expiry. Value is best determined by a DCF with $0 value at expiry.

How many years to expiry?

What are the obligations regarding make good upon expiry? Who does it lie with?

What's the likelihood of renewal?

How good is the sublease? ie is it a tenanted property or you just purchasing an operational business operating on a lease?

It's not too uncommon but also not mainstream.

@Beano is the expert in this area.

 

Hey Mate
Thanks for the reply

76 Years till expiry
I will have to find out re the obligations.
It is a tenanted property, theyve been there for 15Years or so, global tenant.

Thanks mate, ill find out some more info regarding the obligations.

 

Can you summarise the ground lease and lease to the tenant ?

 

I will not comment as some leaseholds have been free-holded on fabulous terms while others can result in negative value (lessor can recover ground leases rental arrears back many lessee's years previous hence the negative value)
As they say "the devil is in the detail"

 

Note ..some countries only have leasehold ..like China .

 

Hey @Beano
Thanks for your response, like you said the devil is in the detail. The ground lease is about 5.5K 3.5% annual increase, recoverable from tennant. However working these numbers with the annual increase, it becomes extremely expensive in the event the property becomes vacant

 

So does any property. That's why you need to understand the sublease & tenant. Whether it's freehold or leasehold, you'll still have the holding costs if it's vacant

 

Have you thought of buying lessor's interest instead ?
Lower returns initially however you catch up in the future.
If you buy right you could have no vacancies for a hundred plus years .
Are you looking at a hundred plus year time frame for your investments or something shorter like fifty years?
The reason why I ask is the type of structure the lesser has on your land.
It has to last the time frame of your investment plan

 

Haha Yep thats for sure! But what i meant was on top of the normal holding costs, at 3.5% annual increase for the ground rent it becomes REALLY expensive

 

Have not thought about that actually
I am looking at 75+ Years ideally

 

If it were a freehold the capital would grow at that rate & the landowner would want the rent reflecting the CG.

 

That's about the limit as many buildings just don't last much more than 100years

 

If you get 50 years out of a commercial building without it becoming obsolescent you're lucky. Tenant generally will rebuild at some stage eg all the redevelopment at Darling Harbour (Convention Centre precinct) wasn't 40 years old before it was demolished, likewise the football stadium etc.