Leasing agreements are common in Australia where one party gives the other property to use for business. The party that usually purchases the property and gives to another individual/ party (the lessee) is referred to as the lessor. Therefore, as the lessor gives away the asset to be used, periodical lease payments will be received.
A leasing agreement is sometimes beneficial and other times challenging for the lessor. Therefore, in this article, we will focus on the advantages and disadvantages that a lessor of a particular property faces.
Advantages that a lessor gains from leasing
Reap high profits
Leasing usually generates higher profits than the rental payments. Because of the risk of payment involved in entering into a lease agreement is quite high, a tenant has to pay a premium to cater for any potential risk. The tenant usually makes the lease payments to cater for the entire lease term. Thus, when the lessor prudently manages the property, higher returns are bound to emanate from the lease. Those high profits that the lessor reaps from the commercial property investment will be utilized to cater for the cost of capital and any other risk that might emerge during the leasing period.
Gives quick returns
An investor will usually wait for some period before an investment matures. Depending on the size and type of investment, you might find that the gestation period for some project to be longer. In that case, such projects which tend to take a long period to mature usually give delayed returns. But, the advantageous thing with lease rentals is that the lessor generates quick returns.
Gain tax benefits
As a property owner in Australia, the lessor has to pay tax to the authorities of the state where the property is located. It is an obligation that often seems heavy a couple of times to the owner of the property. However, the good thing with leasing is that the lessor has the enjoyment of claiming some tax benefits like investment allowance, wear and tear allowance, depreciation etc. on the leased property. That is why you find so many leasing companies successfully employing leasing to reduce the payable tax liability.
Sales increase benefit
Leasing finance is one of the sources of funds that various companies usually secure to finance their operational activities. With this kind of financing facilities that leasing companies offer, manufacturers are able to increase the number of sales that the companies generate. As the manufacturers benefit, the same effects can be reflected the one that is leasing the property. Lessors most do this through going to the manufacturers that are operating on the leased property to demand certain concessions benefit.
Disadvantages that a lessor might encounter when leasing
The property is becoming competitive
The property market in Australia seems to be changing year-after-year. With various developments taking place, the real estate sector is becoming competitive for the investors to penetrate. Therefore, the domestic and foreign companies are making the market tighter even as the number of emerging companies go up. Due to fierce competition, many lessors are finding it hard to get adequate rentals from the lease. As a result, the asset costs will not be recovered and the profit that might be expected from the investment may not be met, and even more, the inability to bear risks will also be compromised.
2. The obsolesce risk is huge
Normally, the building owner is the one who bears the much risk than the individual or business that is occupying the commercial property. Although the lessee will also have to cater for the maintenance of the lease in some manner depending on the clause of the lease, the landlord will have to upgrade the property once the lessor vacates the property. If a property has numerous units, the risk of the building becoming obsolete is usually high. The commercial property type will also determine the level of risk as you will find offices to be riskier than warehouses due to the often upgrade needed on the property.
3. Cash-flow management may be a challenge
Any business wants to have a sustainable cash flow that finances its operations. In the real estate sector as well as leasing businesses are also seeking to efficiently maintain and utilize cash flows. But, will the often unexpected market fluctuations it is becoming difficult to manage the cash flows.
4. Recovering the investment cost takes a lot of time
Any commercial property investor anticipates recovering the cost used to invest before receiving income. You might find that the normal rents will actually make a real estate investor get the money invested more quickly. However, when it comes to lease rentals, the lessor will take a long time to recover the leasing capital outlay. The reason is that leasing involves a lot of inherent risks such that the lease rentals that lessors receive may not actually be the realized profits. Another reason is that leasing companies think that they are paying dividends from the existing earnings only to find out that the payment is sourced from the capital.
5. Loss of user benefits increases costs
Using a particular property usually attracts certain benefits to the one that uses it. In a leasing contract, you might find that buyers enjoy certain benefits like duties, sales tax and other things since they are the actual users of the property. However, the lessor does not benefit from such entitlement that the buyer gets. As a result, the actual property cost will increase compelling the lessor to charge lease rentals that are higher.
In a nutshell…
After discussing the above benefits and detriments that a lessor gets, you now are aware of how a leasing agreement impacts. When leasing a property, you ought to know what you might gain from it and the time the benefits will be realized. It is also good not to assume the challenges that come with leasing a property for use to another individual or company. If you as a lessor know what you stand to gain and what might hinder you from realizing gainful returns, you will be able to be in a better position to make an informed leasing decision.