The Language of Industrial Property
The language surrounding industrial property often includes terminology specific to the industrial real estate sector. If you have not been involved in Industrial property previously, this language can seem quite foreign.
Here are some key terms commonly used in industrial property.
Warehouse: is primarily for storage and distribution. They need to have a high roof line for pallet racking and other storage (6 meters minimum) and good access for large vehicles carrying containers.
Factory: is primarily for manufacturing. They are less reliant on height depending on the manufacturing industry involved.
Lessor: is someone who owns an asset or property and grants the use or occupation of it to another party through a legal agreement known as a lease or rental agreement. Also referred to as a landlord.
Lessee: refers to an individual or entity that obtains the right to use or occupy a property, asset, or piece of equipment owned by another party, known as the lessor, through a legal contract called a lease or rental agreement. Also referred to as a tenant.
Commercial Lease: is a legally binding contract between a landlord (lessor) and a tenant (lessee) for the rental of a commercial property. It outlines the terms and conditions under which the commercial property is leased, specifying the rights and responsibilities of both parties during the lease term. Commercial lease agreements tend to be more complex and customizable than residential leases due to the diverse nature of businesses and their specific needs. It's essential for both parties to carefully review and negotiate the terms before signing to ensure a clear understanding of their rights and obligations throughout the lease term.
Gross Lease: In a gross lease arrangement, the tenant pays a fixed rental amount, and the landlord is responsible for covering most or all of the property expenses, including taxes, insurance, utilities, maintenance, and repairs.
Net Lease: In a net lease arrangement, the tenant pays a fixed rental amount and the tenant is also responsible for paying additional property expenses such as property taxes, insurance, utilities, repairs and maintenance costs.
Going concern is a term used for an industrial property being sold as a GST-free sale. It may be treated as going concern when the industrial property is leased at the time of sale/purchase.
A property can be sold as going concern if all the below apply:
- Payment is made for the supply
- The purchaser is registered (or required to be registered) for GST
- The buyer and seller have agreed in writing that the sale is of a going concern
- The supplier supplies all things necessary for the continued operation of the business
- The supplier carries on the business until the day of supply.
A property that is part of a sale of a going concern can include:
- The premises, together with the assets and operating structure of the business
- A fully tenanted building, where the property and all leases, agreements and covenants are included in the sale
- The sale of a partially tenanted building, where both of the following apply
- The vacant part of the building is either being actively marketed for lease or undergoing repairs or refurbishment
- All leases, agreements and covenants are included in the sale.
Tenant Improvements: Modifications or improvements made to the industrial space to meet the specific needs of the tenant. This might include office build-outs, specialised equipment installation, or structural modifications.
Manufacturing Facility: Industrial properties specifically designed and equipped for the production and assembly of goods, often featuring specialized infrastructure and machinery.
Zoning: zoning is one way the governments can regulate the use and development of land and/or buildings and control growth patterns and characters of areas.
3 Phase Power: refers to the power supply coming into the property by way of underground or overhead power from the street. 3 phase power is typically used in commercial/industrial situations and large homes with multiple large electric appliances drawing larger currents of electricity.
Make Good: refers to the clause in a lease that sets out how a tenant should leave a property when the lease comes to an end, whether by the expiry of the term or earlier termination. The Make Good clause requires the tenants to hand back the property in the same state and condition as at the commencement of the lease
CPI (Consumer Price Index)
The average change over time in how much households pay for a fixed basket of goods and services. In Australia, the Australian Bureau of Statistics publishes CPI figures. The CPI can indicate changes in economic inflation and variations in the cost of living.
Depreciation
The reduction in value of a tangible asset over time. With respect to real estate, depreciation can also mean a drop in the value of property assets due to poor market conditions.
Due diligence
Investigating a potential investment or purchase to confirm all material facts. When someone is preparing to purchase a property, there are many different aspects of due diligence involved. The buyer needs to examine, among other things, the contract of sale, and the planning controls in place that will affect how the land and/or buildings are used.
Public liability
A specific legal liability that can result from injury to a third party, or damage to their property, while that third party is on the owner’s premises. When buying a commercial property, the purchaser must obtain public liability insurance as an essential part of meeting their legal responsibilities as an owner.
Yield
A measurement of the future income an investment property is expected to bring in. Yield is calculated annually as a percentage of the cost (or market value) of the asset.
Gross yield is the income expected to be received before expenses; net yield takes into account running costs of the property, including maintenance costs, management fees and so on.
Yield is particularly important to commercial real estate investors, because it is usually the main source of income they expect to receive from their investments.
Capital growth rates for commercial buildings are often not as high as for residential properties, so the yield on this type of purchase is often a more important factor when deciding whether to buy.