Sunday 18 March 2018

Investors wait in wings as CGT deadline approaches

There is a four-month opportunity for owner occupiers to raise finance for expansion before the CGT deadline on December 31
There is a four-month opportunity for owner occupiers to raise finance for expansion before the CGT deadline on December 31

Donal Buckley

PROPERTY owner occupiers have a four month window of opportunity to raise finance with which to expand their business or reduce their debt burden thanks to next December's capital gains tax deadline.

During the next four months investors are expected to become increasingly competitive in their efforts to snap up investment property before the December 31 deadline for the capital gains tax incentive and this presents the opportunity for owner occupiers.

While this incentive is aimed at encouraging investors to buy Irish property, it also offers an alternative source of funds for some business people who are having problems with their banks.

Over the last 12 months auctions and deals have shown that demand for commercial property investment is not confined to the overseas funds or multi-million euro properties. Smaller Irish investors, who are fed up with the low interest rates offered for deposits, are instead looking to well-let commercial property that offers them a much better return for their investment, and deals have been done at yields of around 8-10pc.


Such investors appear willing to buy properties in which businesses are trading profitably and thus offer a good prospect of sustaining the rental terms. So investors may well buy such premises from the owner occupier and rent it back to them.

Not alone would this allow the business operator to continue operating from the property, but it may also present other opportunities. For instance, those with ambitions to expand but find that their banks are reluctant to lend for such expansion, could find that sale and lease back is one way to generate the funds to acquire another business or perhaps open a new branch or outlet to expand an existing business.

Such owner occupiers will have to do the maths on whether they should wait and see if the property's value is likely to increase or if they can make more money from investing in an expansion or other business opportunity.

Alternatively for those who find that their existing property loan repayments are proving too much of a drain on their business, then the sale and lease back may also help towards a solution.

For instance, if they were to use most of the sale proceeds in order to offer a substantial up front lump sum to their bank, then the bank might in turn agree to reduce the amount outstanding by an additional amount to that achieved from the sale of the property.

Of course it is best to consult first with the bank before selling. It can be argued that this is really not the time to sell because property prices are on the floor and signs of a recovery are just beginning to get under way especially in prime office property.

Furthermore in a cyclical market it is better to wait and take the longer term view of the property price cycle. So for those who can afford to sit it out and wait for values to recover further, sales and lease back may not be an advisable option.

On the other hand, Lisney director Duncan Lyster also points out that rents have also been cut so the rent that they may pay may be more affordable than the mortgage repayments.

Furthermore from next year when the CGT tax incentive ends and with a high 33pc Capital Gains Tax (CGT) charge on future profits from the sale of property, investors may not be as enthusiastic as they are over the next four months.

The CGT incentive will allow those who buy property between now and the end of December and who hold it for seven years to avoid paying CGT on any profits that would arise over those seven years.

Up to the first quarter of this year investors have been attracted by well located properties with good occupiers which offer yields of around 9pc to 12pc. Such yields would not be very conducive for owner occupiers considering a sale and lease back as it suggests that they would have to take a very keen price or pay a very generous rent. But since then investors have been settling for yields of less than 8pc.

This is especially true for properties where tenants with a very good trading business, are reliable with rent payments and are willing to sign up to a medium or longer-term lease.

There may also be opportunities to negotiate on the basis of a turnover related rent with the investor being offered the benefit of sharing in any growth in the business.


Duncan Lyster also points out that with sale and leaseback deals both parties will always struggle to find the balance between rents and price. "It depends on whether you (the vendor) want a large amount of capital now or whether you want to pay low rents in the short-term.

"It may be possible to protect the business from high rents in the future by including rent indexation in the lease.

"But sometimes investors too don't want high rents at the outset as they may prefer to see potential for future rental growth," he adds.

For those who own the property personally, a sale and lease back can also alleviate cash flow pressures arising for owners who may be taking substantial salaries from the business in order to pay off the commercial property mortgage.

Salaries are subject to income tax and so the high salaries can prove a drain on the cash flow of the business.

If the sale and lease back enables a person to reduce their mortgage to more manageable levels, it could enable the business to achieve more healthy levels of cash flow and perhaps even profits.

While no one feels it is right to sell at a time when property prices are more than 50pc off their peaks, nevertheless it may be better to cut the losses now especially if the cash generated enables a business to grow.

Consult your financial adviser before taking any action on dealing with your debts.

Irish Independent

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