Owning vs leasing property with potential to rezone

Opportunities exist for mid-size business owners who own or lease premises to add significant value to their business. With the right property advice, a business owner who leases property will have a comprehensive understanding of the implications of the lease and the net benefits that can accrue to them.

Too often we see business owners surprised by obligations imposed at the termination of a lease, for example, through unexpected and expensive ‘make good’ clauses – it’s important to be aware of and allow for such potential outlays upfront. We recommend regular reviews or ‘audits’ of lease arrangements and lease documentation to ensure you understand and are meeting all obligations, as well as enjoying any benefits allowed under the lease agreement.

As a business owner, how often do you assess how the property that your business utilises is performing? Often the inherent value of business premises are ignored, however there is merit in reviewing the operating costs regularly and having an understanding of the current value of the property external to the business.

For example, business owners who operate from their own premises, may find it more advantageous to sell and lease back their asset to free-up cash (or minimise debt), and invest the additional funds back into their business or other growth plans.

The value-add potential can be significant when considering the money locked up in business property that could otherwise be used to fuel growth or alternative investment opportunities.

Regular evaluations of your property holdings is good business practice. Whether you’re an owner occupier or you lease to others, we recommend regular property/investment assessments, where ask yourself the following questions:

  • Is there merit in a sale and lease back arrangement to unlock cash now?
  • Have you undertaken a ‘highest and best use’ analysis on each property?
  • What are the risks with each property?
  • Is there potential to add value through a redevelopment or linking with a joint venture partner with the skills to do so?

Case study

A client with a building in an expanding residential zoned area

A common example is where a business owns an industrial site where they operate a small warehouse or factory. If circumstances change, the business may simply sell the site or consider a redevelopment, either independently or through a joint venture. The benefit of the latter arrangement is that the development risk is transferred. The business still obtains current market value for the land but now also shares in any development profit.

In assessing the value of a client’s site recently, we prepared an analysis of the value add if it was converted to a residential development. In this instance the value uplift was in the region of $20 million. Through an understanding of the likelihood of the site being rezoned to residential within the next three years, we were able to advise the client of the opportunity and identify potential joint venture partners for them.

Another common scenario is where business owners find the land on which they have leased their warehouse or factory is rezoned as residential. What could be expected?

In this case, the lessee would receive notification from the property owner that they intend to redevelop the site and require vacant possession. However, the lessee is protected by the lease and unless the lessor makes an attractive financial offer that they choose to accept for early termination of the lease, they are not required to move out until the lease term expires. Where the lease has an option remaining, it is the lessee’s option to extend the time before the owner takes eventual possession and carries out any redevelopment.

John Elvy is a Grant Thornton Australia real estate and construction industry consultant. John has practised in the real estate and development profession for over 40 years, advising on property investment strategies, project development and building national and international property networks.

John was an Executive Director with Colliers International and Knight Frank; Managing Director of LJ Hooker Limited, then Chairman of the LJ Hooker Commercial Group. As Executive General Manager Development of Leighton Holdings Limited, John sourced commercial projects in South East Asia and the Middle East. Retiring in 2013 from the chairmanship of Leighton Properties, John subsequently spent over a decade as a non-executive director.

John has also served in local government, as a City of Sydney councillor and as Mayor of Strathfield Municipal Council. He is currently the NSW Vice President of the Property Council of Australia.

Next article: New South Wales update.