Fund Commercial Fitout Before Lease Renegotiation
The situation
A landlord owns a commercial property in regional New South Wales. The building is currently leased to a single tenant for $33,500 per month, net. The current lease has less than one year to run.
The landlord has a current bank valuation for the property of $6.4m on a 6.25% yield. The current mortgage on the property is $3.2m at a 50% loan to value ratio (LVR) and an interest rate of 2.9% pa.
The landlord is currently negotiating a new 5+5 lease with the tenant for an initial net rent of $35,000 per month escalating at 3% pa. To sign the new lease, the tenant is looking for a 6-month incentive, or $210,000.
The landlord has approached their mortgage broker to help them fund the incentive and refinance the loan.
PropPay solution
PropPay signs a 36-month concurrent lease with the landlord paying the landlord $210,000 rent in advance and $27,802 a month which increases every twelve months by 3% in line with the underlying property lease. PropPay collects the monthly rent from the tenant for the duration of the concurrent lease.
PropPay’s monthly Admin fee of just 0.65% is $1,365 or $49,140 over the term of the concurrent lease, a discount of just 3.79% on the total property rent over the 36-month term.
As a result of the new 5+5 lease, the mortgage broker is able to refinance the loan on better terms – an LVR of 55% and an interest rate of 2.8% pa – based on a new bank valuation of $7.3m at a 5.75% yield.
The increase in property value of $868,000 allows the landlord to potentially increase the mortgage against the property and release up to $800,000 in cash.
The landlord has achieved their objectives of negotiating a new, longer lease and refinancing the loan while at the same time improving the value of the property
* Illustrative only. Individual circumstances may result in different outcomes. Subject to approval. Terms and conditions apply. Differences due to rounding.
