We have all heard of the phrase “buyer beware”. Buyers need to make sure they have done their homework before bidding on property. For buyers new to the Irish market, we have some pointers to watch for when investing in commercial property in Ireland.
1. Choosing the right property at the right price
When deciding on a location, it is important to consider the possible hidden costs. Is the property a protected structure, in an architectural conversation area or in an area where more stringent planning requirements are applied? Are there any tax incentives, grants or reliefs that you can avail of?
2. Sourcing finance for the investment
Over the last number of years a lot of investors were cash buyers. In the last year/eighteen months more investors are being financed through a mix of bank finance and private equity. Sourcing finance can be difficult given the high costs of arrangement fees and exit (“break up”) fees being charged by private equity houses. On the other hand banks are taking a very conservative approach to due diligence which tends to prolong the transaction.
3. Commercial rates – arrears- section 32 of the Local Government Act 2014
Section 32 of the Local Government Reform Act 2014 applies to all sales/leases closing on or after 1st July 2014, irrespective of the date of the contract, and introduces changes such as a statutory obligation on a vendor to notify the rating authority that a sale has taken place within 14 days of completion. Vendors are obliged to discharge all arrears for which the vendor is liable (i.e. six years). Purchasers need to be aware of Section 32 so to avoid excess rates affecting the property for a twelve year period. If you acquire a property with arrears of rates, the liability will pass to you on transfer of title. Unpaid rates attach to a property as a charge for a twelve year period. Landlords should also ensure an occupational tenant has paid their rates bill in full prior to consenting to an assignment or sub-lease.
4. Planning compliance
It is essential that investors properly carry out planning due diligence on the asset to ensure it is fully compliant with all planning, building regulation and fire safety requirements. The cost of rectifying a property up to current standards can become cost prohibitive. In addition, resolving any enforcement or warning notices will take time and may impact financier’s requirements or loan amounts they are willing to provide for the property.
5. Distressed properties
Distressed properties can present good value for money presently due to the reduced purchase price. When buying distressed assets, it is crucial to carrying out enhanced due diligence on the property as it is most likely that the borrower may not be assisting the fund who is selling the property. It is usual for the standard contract warranties as to planning, boundaries, services, easements and identity to either be limited or deleted in these sales. It is also vital to check for any ongoing litigation and judgments which may affect the property to ensure the security can be removed and the asset sold free from encumbrances.
6. Occupational Tenants
When purchasing an asset with occupational tenants consideration should be given to the potential for significant exit costs at the determination of a lease. These can arise as a result of repair and yield up obligations in the occupational lease. It is important to review the repairing and yield up obligations in place and have they been met accordingly as well as confirming that all rents due and owing have been paid up. Dilapidation costs can be quite significant and should be factored into future budgets for the property.
7. Tenancy Rights
Investors should always have their solicitor check whether occupational tenants have signed a deed of renunciation. This deed means the tenant has renounced its statutory rights to renewal of a tenancy. An investor should make full enquiries as to how long a tenant has been in occupation of the property as the clock begins from the date of occupation rather than the date of the lease. Where no deed of renunciation has been signed and a tenant has accrued tenancy renewal rights a tenant may be entitled to compensation to vacate the premises which again can be costly depending on the rent roll and duration of occupation.
8. Dilapidation disputes
It is the tenant’s responsibility under a lease agreement to maintain and repair the premises to a reasonable condition. The standard will be set out in the lease, the terms of which would have been negotiated prior to the completion of the lease. For an investor to minimize their dilapidation costs, it is vital that repairing obligations are understood, recorded in a schedule of condition and plans for repair are made.
9. Management company
A purchaser should assess how well managed a property is particularly if they are purchasing a unit in a multi-family property. It is common that distressed properties are not well managed and in some instances may not have common areas transferred or a management company in existence. Enquiries should be made as to whether common areas are transferred, if not when it is expected to be transferred, who is running the building and more importantly that it is insured. Managing agents may be appointed but without a formal management company structure with equal voting rights, larger unit holders or the developer may hold sway over smaller units. Managing fees can be high and this cost must be factored into budgets when acquiring a property. If buying a whole property that does not have common areas transferred, please factor the cost of having them transferred as there is a legal obligation to do so under the Multi Unit Developments Act, 2011.