The true story about how we stumbled onto a great add-value, long-term buy-and-hold investment, the due diligence we went through, and the awesome results.
38 Richard Pearse Drive, situated in the Airport Oaks district of Mangere, Auckland, had been on the market for over two years.
We didn’t even know it was on the market, and only stumbled across it while looking at a nearby building for our Provincia property fund.
Puzzled by the numerous real estate signs from multiple agencies, some fallen down and overgrown, we investigated and discovered why it hadn’t sold.
Poor marketing was a factor. But a bigger factor by far was that the front tenancy, leased to 24/7 Fitness, only had a year to run. And the rear tenancy was leased to Early Settler Group at 30% below market, but there was no upside until the lease expired in 3.5 years because they were on CPI rent reviews.
We got the building under contract for $4.985 million using our get-out-of-jail-free due diligence clause and discovered why it had sat for so long…
- Run down building
- No Building WOF
- No CCC
- Difficult vendor
- Difficult lawyer
During due diligence, we signed a new 6-year lease with 24/7 Fitness, subject to us going unconditional. This included two-yearly rent reviews and a bank guarantee.
We also dug into the costs required to undertake the remedial work, get the CCC signed off, and get the Building WOF.
The final number for this work came to $300k so before going unconditional we reduced the purchase price by $300,000.
We went unconditional and purchased the building for $4.685 million. After remedial work of $300k the total cost was $4.985 million.
We then got the building revalued. With the new lease to 24/7 Fitness and a fully compliant, much tidier site, the valuer valued the building at $5.6 million.
Instant capital gain of $615k after costs!
It gets better though. Six months later Early Settler Group advised they would not be exercising their right of renewal. They were quite apologetic, but we were overjoyed.
You see, their current rent was $85/m2 and the market rate was $125/m2 … 47% higher than Early Settler were paying!
The building is in a great location so we had tenants fighting for it. Two different agencies tabled leases from potential tenants. One agent even dropped his commission to swing the deal.
Of the two finalists, we chose a logistics company because they would be easier on the building than the other potential tenant. The new rent was $125/m2 which was a $50k increase.
And we had no vacancy loss because their lease started the day after Early Settler’s finished.
We then got the building revalued again. This time the valuation came in at $6,369,426.
This more than doubled the capital gain to $1,384,426. Oh the joy!
Before & after snapshot…
- $4,985,000 total cost
- $358,000 rent
- 7.2% yield (on total cost)
- $6,369,426 valuation
- $408,000 rent
- 8.2% yield (on total cost)
- $1,384,426 capital gain
38 Richard Pearse Drive was Provincia’s first acquisition. Since then, investors have enjoyed a 33% increase in share price and quarterly cash dividends of 6.17% p.a.
Provincia’s strategy is to provide the closest alternative to direct property investment as possible, targeting a pre-tax cash yield in excess of 6% p.a. for the years ended 31 March 2019 and 31 March 2020, and long-term capital growth.
Provincia is a PIE fund, which has very favourable tax implications.
- Shareholders pay tax on their share of Provincia’s net taxable income (based on their shareholding percentage) at their prescribed investor rate (PIR), with a maximum PIR of 28%.
- Shareholders directly benefit from their share of Provincia’s tax deductions, including tax depreciation deductions.
- Tax is calculated and paid on your behalf by Provincia.
- No tax is payable on dividends.
- Should Provincia realise a capital gain in the future, this can be distributed to shareholders tax-free.
To learn more about tax-effective investments in Provincia property fund, give us a call…
Or, if your preference is to buy your own commercial investment property and you’d like to learn how to buy commercial properties like a pro, get in touch…
Look forward to hearing from you 🙂