11% cap investment on lower Queen St, but..

[fudosan]

Several units from Quest Hotel on lower Queen St did not sell in recent mortgagee auction and are now listed for a fixed price, giving a cap rate of 11%. Top location and long lease, but apparently little interest.

A number of issues are not clear.
1. Many CCCs on LIM have not been issued.
2. The body corporate structure and rules are not clear, as most (if not all) units are leased to Quest.
3. Outgoings are unknown.

What do you think?

[Orkibi]

it may be gross 11% upfront but 5% after all expenses mentioned above.
today you can buy 10% properties with out been tie to management contract etc.

It is not my cup of tea anyway.

[Davo36]

Fudosan:

1) Can you choose whether the units are part of the hotel pool of rooms for let or not? i.e. can you let it yourself? Not sure which would be better.

2) Does the hotel operation pay the owner rent if/when the unit is empty? I looked at something similar to this some years ago just after the America's Cup had been on. While that was on the unit was full and lots of rent came in. After that it sat empty, not rent came in and the holding costs and hotel charges were very high.

3) As above, I imagine the costs charged by the hotel operation are quite high. You need to find out about what these are.

4) So how did you get the cap rate figure of 11%? Do you have gross return figures? Need to have a close look at those.

How long is the lease?

David

[fudosan]

1) Can you choose whether the units are part of the hotel pool of rooms for let or not? i.e. can you let it yourself? Not sure which would be better.

NO. You can rent out the units only at the end of the lease (could be over 20 years away).

2) Does the hotel operation pay the owner rent if/when the unit is empty? I looked at something similar to this some years ago just after the America's Cup had been on. While that was on the unit was full and lots of rent came in. After that it sat empty, not rent came in and the holding costs and hotel charges were very high.

Fixed rent is paid in arrears on the first day of each month. (Is it uncommon?) Rent is increased by 2% every year.

3) As above, I imagine the costs charged by the hotel operation are quite high. You need to find out about what these are.

Landlord pays rates, body corporate fees, and part of insurance premium. If necessary (pretty hard to determine, I think), the landlord is to replace the carpet, repaint, clean, and refresh the units at the end of the 1st term. Also, if hotel services are suspended due to problems such as power and water, rent is deducted.

4) So how did you get the cap rate figure of 11%? Do you have gross return figures? Need to have a close look at those.

I was given figure that I thought was net, but when I digged deeper into the lease document, I found it was actually gross. Since no figures on rates etc. are provided, bidders at the mortgagee auction had no way of calculating the cap rate.

How long is the lease?

6x6x6x6


Other observations:

• Overall, the lease is a specially created 38-page document which is quite difficult to read. It appears it was created by the tenant as expressions such as "for the benefits of the Tenant" are included.
• The body corporate rules could not be provided despite strong request.
• Tenant has the power to appoint body corporate manger.
• Use of "Holding over" clause. (From the lease)

  In the event of the Tenant holding over after the expiration of the Term granted by this Lease, the Tenant will become a monthly tenant only of the Landlord at a monthly Rental equivalent to the monthly proportion of the then total annual Rent payable and any other monies payable by the Tenant herein at the expiration of the Term and otherwise on the same terms and conditions mutatis mutandis as those herein contained so far as applicable.

  Any comments?
• A Google search reveals the units are owned by the developer of the buidling. What puzzles me is that why would a very expereinced developer not concerned with getting final inspection so all CCC can be issued.
• I just noticed that 13 more units from the same building are for sale now. As my Google search did not reveal any sale of the units to the general public before, I can assume these are all from the same developer.

[Davo36]

All sounds a bit like the tail wagging the dog doesn't it? They've built the building and put in place the lease they want.

Still, there may be an opportunity there. Has the mortgagee auction occurred yet?

If you do decide to buy, may be wise to get your lawyer to read that lease and advise you what he/she thinks. No point skimping on this sort of thing or it could cost you big time later. Just have to take cost into consideration when deciding on value.

The fixed rent seems good actually, so you'll get paid whether it's full or not, which is what you want. You can look up the rates on the council's website, divide by no. of units to get a very rough approximation of how much that costs per unit. A better calc is to go on unit entitlements (can explain this if necessary).

You simply need to see the body corp costs and rules. Do you know who runs the body corp? Probably the developer if they own the bulk of the units. So if they are selling, a new manager may need to be put in place really.

I find mortgagee sales quite tough. Very hard to find the details you need and often they're not selling at any great discount - yet. I think they may sell at better prices later in the year. Takes a while for everyone (including the banks who lent the money) to get used to the idea that their properties are not worth the overpriced figures used in recent times.

CCC: You can go to the council and find out what needs to be done for CCC.

David

[fudosan]

The mortgagee auction was held recently with very poor response and the properties were passed in.

I want direct control of properties, so letting a hotel dictate my income is not my cup of tea.

CCCs were approved but a final inspection is still required before they could be issued. Wonder why the developer has conveniently forgotten to get it done.

David, have you ever come across the "Holding over" clause?

[Davo36]

No I haven't seen that clause before but it seems OK. Doesn't it just mean they go on to a monthly tenancy at the end of the lease? That's what generally happens anyway.

David

[fudosan]

David, is it included in standard ADLS/BOMA Deed of Lease? How long can tenants stay on just paying monthly rental? I always thought tenants pack their bags and leave before the end of the lease if there is no renewal in place far in advance.

[Green Fish]

Tenants don't always do what they are supposed to do.

Isn't the main issue the financial strength and anticipated longevity of the hotel company? Given the 24-year term, it's similar to buying shares or bonds issued by a public company.

If you want direct control, then go for a standard "shoebox" in one of the many unit-titled buildings. The BC Rules will be available from LINZ, and you will get a s36 certificate re outgoings, even without a due diligence clause. (But in the present environment, you should get approx. 4-6 weeks to do due diligence and access the BC accounts.)

[Davo36]

Fudo, I don't think it's in the ADLS lease. Don't know about BOMA.

Often tenants try to slide onto a month by month lease if they can . They still get the use of the place but have no long term obligations. The thing is they usually seem to not realise that they can also be given a month's notice to vacate.

I guess they can stay as long as they want to and the landlord is happy for them to. Sometimes these things run for years. But of course you can always end it if you want.

GF, yeah I'm not sure I would buy a hotel unit either. Especially when they have written their own lease. Not enough control.

David
PS: Did you guys see this? Quite important I think: http://www.propertytalk.com/forum/showthread.php?p=161810#post161810

[fudosan]

The BC Rules will be available from LINZ, and you will get a s36 certificate re outgoings, even without a due diligence clause.

I looked at LINZ's website but couldn't find this information. For example, the following pages show what's in a LINZ land record and how to order, but nothing is said about BC Rules and Section 36 Certificates.

https://www.linz.govt.nz/docs/titles-and-records/landrecords/order-records-fact-sheet.pdf

http://www.linz.govt.nz/survey-titles/order-fees/index.aspx

In my experience, getting BC Rules from agents is not too difficult, but not with Section 36 Certificates. I prefer doing all due diligence upfront (so cash offers can be made). If there is a way to obtain all pertinent information quickly, this will be very useful.

[Green Fish]

Fudosan: If you look at the title search for the unit, you should see a reference to the "Supplementary Record Sheet". If you get a copy of this document, you should see references to the BC Rules (and any amendments thereto).