Property

Back to Base

• Strip asset back to fundamentals

• May involve full repositioning or redevelopment (including demolition)

Clean & Tidy

• Light-touch improvements

• Cosmetic upgrades to improve presentation and leasing appeal

Make Good

• Restore tenancy to required condition at lease expiry

• Requires detailed lease review to ensure:

  • Correct scope

  • Consistent terminology

  • Enforceability of obligations

WALE (Weighted Average Lease Expiry)

• Measures average lease duration across tenants

• Key considerations:

  • Longer WALE = greater income security

  • Shorter WALE = greater flexibility to capture rental upside

• ~5 years often considered optimal balance

WALE (Weighted Average Lease Expiry)

• Potential to increase rental income to market levels

• Strategy:

  • Shorter leases or upcoming expiries

  • Replace enants or reset rents at higher rates

Asset Classification - Core

• Stable, fully leased, low risk

• Long WALE, strong tenants

Asset Classification - Core Plus

• Generally stable but with some upside potential

• Minor leasing, capex, or repositioning opportunities

Asset Classification - Opportunistic

• Higher risk, higher return

• Development, repositioning, or significant leasing risk

Rental Costs Paid by Agent

• Derived from rental statements

• Typically includes:

  • Outgoings recovered from tenants

  • Property-level operating costs

Rental Costs Paid by Owner

• Direct expenses borne by owner (e.g. Riverlee), including:

  • Marketing & leasing costs

  • Fit-out contributions / incentives

  • Legal expenses

  • Management fees

ICR (Interest Coverage Ratio)

• Measures ability to service debt from income

• Sensitive to reductions in net property income

Rental Abatement

• Incentives (e.g. rent-free periods) reduce effective income

• Impacts:

  • Net Property Income (NPI)

  • ICR performance

Lease Structuring Considerations

• Particularly relevant for major leases

• Requires financial modelling using:

  • NPV (Net Present Value)

  • IRR (Internal Rate of Return)

Outgoings (agent reports)

These are expenses the landlord pays to keep the building operating, like:

• Cleaning

• Security

• Electricity (common areas)

• Repairs & maintenance

• Council rates, insurance

• Lift servicing, fire systems, etc.

👉 Think: “What does it cost to keep the building open and functioning?”

Recoveries (paid By Owner)

Recoveries = the portion of those costs paid back by tenants

Most commercial leases say tenants must pay their share of these costs.

So:

• Landlord pays the bills upfront

• Then charges tenants their portion

• That reimbursement = recovery of outgoings

👉 Think: “What do tenants pay back to the landlord?”

Why don’t outgoings and recoveries match?

Recoveries ≠ Outgoings because:

• Some costs are non-recoverable (landlord pays them)

• Vacant space → no tenant to recover from

• Timing differences (cost incurred vs billed)

• Lease terms differ between tenants

Outgoings ↑

 (higher costs) → usually bad

Recoveries ↑

not always “good”, often just reflects higher costs being passed through

Typically recoverable outgoings

These are costs that are directly related to operating the property and are usually shared with tenants:

Building operations, utilities, maintenance and servicing, statutory and fixed costs, management fees

Typically non-recoverable (landlord costs)

These are costs the landlord generally cannot pass on:

Ownership and investment costs, capital works, leasing and tenant related incentives, legal fees & marketing, and certain big off one repairs

Outgoings ↑ more than recoveries

→ landlord is absorbing more

Recoveries ↑ more than outgoings

timing or prior under-recovery

Triple Net Lease

A triple net lease (often called an “NNN lease”) is a type of commercial property lease where the tenant pays not just rent, but also most of the property’s operating costs.

What the “three nets” are:

Under a triple net lease, the tenant typically pays:

1. Property taxes

2. Insurance

3. Maintenance (repairs, upkeep, sometimes management costs)

So instead of the landlord covering these expenses, they’re “passed through” to the tenant on top of the base rent.

Development Clause:

A development clause is a lease provision that gives the landlord flexibility to redevelop, refurbish, or alter the building.
> It may allow the landlord to:
> Relocate tenants within the building
> Terminate the lease early (sometimes with compensation)
> Access premises for works

Full makegood:

Full makegood means the tenant must return the premises to its original condition at the end of the lease. This can include:
> Removing fitout (walls, cabling, flooring, etc.)
> Repainting
> Reinstating base building condition

Important financially:
> Creates a future cost obligation for the tenant
> Impacts leasing incentives and negotiation
> Can influence end-of-lease cash flows

DLP period:

The Defects Liability Period (DLP) is a set time after construction finishes where the builder must fix defects. Typically: 6–12 months after practical completion

Covers:
> Faulty workmanship
> Material defects
> Developer/owner can require the builder to fix issues at no extra cost

From your perspective:
> Reduces risk of unexpected repair costs post-completion
> Important for handover quality and contractor performance
 

Divestment Fee:

A divestment fee is a fee payable when an asset is sold (divested).

Often tied to:
> Fund managers
> Asset managers
> Development partners

Usually calculated as:

% of sale price, or

% of profit / equity value

Think of it as:
> A transaction or exit fee
> Impacts net sale proceeds and investor returns

Div7A

• Div 7A is the rule that companies must not take money out of a company tax free

• Money taken out must be treated at a loan and have interest

• Therefore, you need to track the Minimal Yearly Repayment (MYR) and pay this every year

• AND charge interest every year (which this rate is set by the ATO)

2026 MYR (Minimum Yearly Repayment)

 includes principal and interest - the required repayment for the year

What are the key risks of Div7A?

• MYR Shortfalls -  Repayment < MYR → That difference becomes a taxable dividend

• Missing Interest - then loan becomes non-compliant

• UPEs (Unpaid Present Entitlements) - Trust owes company money - If left unpaid → becomes Div 7A loan

IRR

IRR is the annualized return rate that makes the net present value (NPV) of all cash flows equal to zero.

In simpler terms:

• It estimates the return generated by a property investment.

• It accounts for timing of cash flows, not just total profit.

• A higher IRR generally means a more attractive investment.

Unlevered IRR

Looks at the property itself.

Cash flows:

• Purchase

• Net operating income

• Sale proceeds

No debt included.

Used to evaluate the asset.

Levered IRR

Includes financing.

Cash flows:

• Equity contribution

• Loan drawdowns

• Interest payments

• Principal repayments

• Sale proceeds after debt repayment

Used to evaluate investor returns.

Example:

• Property IRR = 8%

• Equity IRR = 13%

Debt magnifies returns.

NOI (Net Operating Income)

NOI = Rental Income - Operating Expenses
 

Excludes:

• Interest expense

• Income tax

• Depreciation

Examples of operating expenses:

• Property management

• Council rates

• Insurance

• Maintenance

What is NPV?

Net Present Value. The present value of future cash inflows less the initial investment. Positive NPV generally means value is being created.

What is yield?

Annual income divided by property value.

Yield = Net Rent ÷ Property Value

What is Capitalisation Rate (Cap Rate)?

The market yield used to convert property income into value.

Formula:
Value = NOI ÷ Cap Rate

What is Market Value?

The estimated price a willing buyer and seller would agree on in an arm's length transaction.

What is a Valuation Movement?

The increase or decrease in a property's carrying value between valuations.

What is a Capitalisation Approach?

Valuation method based on capitalising maintainable income using a market yield.

What is Discounted Cash Flow (DCF)?

Valuation method that discounts future cash flows and sale proceeds to present value.

What is Terminal Value?

The value of a property at the end of a DCF model.

Usually based on stabilised income and an exit cap rate

What is Gross Rent?

Rent paid by tenant before recoveries and incentives.

What is Net Rent?

Rent received after landlord obligations are considered.

What are Owner Recoveries?

Amounts recovered from tenants for outgoings paid by the owner.

What is an Incentive?

Benefit given to secure a tenant.

Examples:

• Rent-free periods

• Fit-out contributions

• Cash incentives

What is CAPEX?

Capital expenditure.

Money spent to improve or extend an asset rather than maintain it.

Difference between CAPEX and Repairs?

CAPEX improves an asset.

Repairs maintain an asset.

What is Practical Completion (PC)?

Stage where construction is substantially complete and can be occupied.

What is Contingency?

Budget allowance for unexpected project costs.

What is Total Development Cost (TDC)?

All costs incurred to deliver a development.

Includes:

• Land

• Construction

• Consultants

• Finance costs

• Marketing

What is Fair Value?

Price that would be received to sell an asset in an orderly transaction.

What is Impairment?

Reduction in carrying value when recoverable amount falls below book value.

What is Recoverable Amount?

Higher of:

• Fair value less costs to sell

• Value in use

What is Deferred Tax?

Tax effect arising from temporary differences between accounting and tax treatment.

What is a Temporary Difference?

Difference between accounting carrying value and tax base.

What is LVR?

Loan-to-Value Ratio.

Formula:
Debt ÷ Property Value

What is an Interest Cover Ratio (ICR)?

Measures ability to service debt.

Formula:
EBITDA ÷ Interest Expense

What is a Debt Covenant?

Financial requirement imposed by lenders.

Examples:

• Maximum LVR

• Minimum ICR

What is a feasibility model?

A financial model used to determine whether a development project generates an acceptable return.

What are the key inputs in a feasibility?

• Land cost

• Construction cost

• Consultants

• Marketing

• Finance costs

• Contingency

• Sales values

What is Total Development Cost (TDC)?

The total cost required to complete a project.

Formula:
Land + Construction + Consultants + Finance + Marketing + Contingency

What is Gross Realisation Value (GRV)?

The total expected revenue from the completed project.

What is Development Profit?

GRV – TDC

What is Development Margin?

Development Profit ÷ TDC

Why is development margin important?

It measures profitability and is often a key investment hurdle.

What is an Equity Multiple?

Total Equity Returned ÷ Equity Invested

What is a drawdown?

Funds advanced by a lender during a project.

What is a drawdown notice?

Formal request to a lender to release funding.

What is capitalised interest?

Interest added to the project cost rather than paid immediately.

Why is interest capitalised?

Because the asset is still being developed and not yet generating income.

What is LTC?

Loan-to-Cost Ratio.

Formula:
Loan ÷ Total Development Cost

What is the difference between LTC and LVR?

• LTC = Debt against project cost

• LVR = Debt against property value

What is refinancing risk?

Risk that debt cannot be renewed or replaced on acceptable terms.

What happens to value when cap rates fall?

Property values generally increase.

What happens to value when cap rates rise?

Property values generally decrease.

Why do interest rates affect property values?

Higher interest rates often increase required yields and reduce values.

What is a stabilised asset?

An asset operating at expected long-term occupancy and income levels.

What is a reversionary asset?

A property with income below market potential.

What is a fit-out contribution?

Time where the tenant occupies the premises without paying rent.

What is an anchor tenant?

A major tenant that attracts customers and supports occupancy.

What is occupancy?

Formula:
Leased Area ÷ Total Lettable Area

What is vacancy risk?

Risk that space remains unleased and generates no income.

What is a trust distribution?

Cash distributed from a trust to unitholers.

What is a unit holder?

An investor who owns units in a trust.

What is a Special Purpose Vehicle (SPV)?

A separate entity created for a specific project or asset.

Why use an SPV?

To isolate risk and simplify ownership structures.

What is due diligence?

Investigation of a property before acquisition. This involves a review of:

Legal

• Financial

• Leasing

• Environmental

• Tax

What is a purchase price adjustment?

Adjustment to settlement price based on agreed conditions.

What is settlement?

Legal acquisition of a property

What is a favourable variance?

Actual result better than budget.

What is an unfavourable variance?

Actual result worse than budget.

What is a forecast?

Updated estimate of future performance.

If valuation increases by $2m, does cash increase?

No. Valuation gains are typically non-cash.

What is the biggest driver of IRR?

Timing of cash flows.

If you only had 30 seconds to assess a property deal, what would you look at?

• Purchase price

• Yield

• WALE

• Occupancy

• Debt levels

• Expected IRR

• Major risks

What is current tax?

Tax payable on taxable income for the current year.

What is deferred tax?

Future tax consequences arising from temporary differences between accounting and tax treatments.