Whereby the freehold land and buildings are owned generally by a passive investor with a lease in place to the “Business” owner.
Accommodation properties are widely considered excellent commercial investments. They generally offer far greater stability of tenancy than conventional commercial investments (shops, factories, offices) because they provide both home and business to a lessee who has made a significant financial commitment to be there. Lessees are reluctant to walk from their investment as they have too much to lose. Banks favour such investments as they generally have long term leases with the freehold owner having little commitment to ongoing repairs and no commitment to the business operation. These are generally “bottom drawer” investments highly sought after by family trusts and wealthy individuals. The location of these properties is usually exceptional being on main arterial routes or high profile positions. A legally binding long term lease agreement is established, often with the landlord having first option to buy the lease should the operator wish to sell. In the unlikely case a lessee defaults on rent payments, the investor can resell the lease to a new lessee for another full premium and restart the lease term. We know of no other investments where the freehold owner could be financially advantaged by a lessee’s failure. Mostly when a tenant fails in a retail, commercial or industrial investment then the owner looses money in the form of a vacancy period, advertising costs, contribution to tenant fit-out, rent free periods and other incentives. In a motel investment it could well be the owners “best day”.
The lessee buys the lease (as outlined above) and signs a commitment to pay rent to the investor owner for use of the land and buildings. Usually the lease includes an initial term with further renewal options. Rental is based on market and is reviewed every 2 or 3 years and normally cannot fall as it is held by way of a “ratchet” clause.
The lessee must comply with the terms of the lease, paying all costs incurred in running the business, including repairs, maintenance, rates and insurance. The main responsibility of the investor normally is to cover all structural maintenance/repairs. Because your tenant has bought their business, which is also their home and income source, they will work hard to maintain and build its value - which, in turn, can be positively reflected in the value of your property asset. The better the lessee/tenant does then the more rent they can afford to pay and ultimately your investment value will grow as well.
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