It’s here again, the end of the financial year,

Napier & Blakeley are the original experts in property depreciation deductions – we will make sure that you do muscle up and receive the maximum benefits available to you through depreciation and capital allowances.  Our experience is second to none in the market place and our track record speaks for itself.  So let us wrestle on your behalf.

It’s at this time every year that we provide an update of the legislative goings on in the accounting area of property depreciation and over the past 12 months there have been a few.

Firstly the much anticipated Green Depreciation Consultation paper was launched, Napier & Blakeley briefed on this paper when it was released in December. The paper provided allowances for “Green” related works that take a building of a 2 star NABERS rating or below to 4 star NABERS rating or above.

Essentially the scheme outlined was overly complex and did not provide any immediate relief to the tax payer, instead over burdening them with red tape. Submissions were to be provided at the beginning of the year and unsurprisingly the overall weight of submissions did not have anything favourable to say about the proposals. As a result the Government has delayed the scheme until 2012.

Other depreciation news relates to the an announcement in this years budget extending the value at which assets may be written of for small business to $5,000. There have also been some minor changes to the classification and effective lives on specific asset categories.

A major change not widely publicised is the requirement now for all Quantity Surveyors providing tax depreciation schedules including those carrying out inspections to be registered tax agents. Before this recent change there has been no requirement for a Quantity Surveyor to have any formal registration before providing a report of depreciation allowances. The tax practitioners board is yet to agreed the level of education and experience a “Suitably Qualified” individual requires to be engaged in the provision of tax depreciation schedule. Discussions on this subject are ongoing though you should be aware that all individual providers of depreciation schedules should be registered otherwise their reports may not be accepted by the ATO.

Napier & Blakeley’s main tax tip for the 2010/11 tax year is to not forget about your capital expenditure. The works that have taken place over the past 12 months can be many and varied whether it’s refurbishment of common areas or landlord owned contributions there’s almost certainly opportunities to increase the value of depreciation claim for this financial year. All too often though these costs are incorrectly treated, write off’s go unclaimed and end up living on you depreciation schedules for all eternity.

Don’t miss out on the benefits, contact Napier & Blakeley and let the industries trusted advisors help you to maximise your return this financial year.

Contact

If you want further information on tax depreciation, or any other Napier & Blakeley services please contact any of our offices below:

Melbourne - John Mathew    03 9915 6300           jmathew@napierblakeley.com

Napier & Blakeley services

• Technical Due Diligence
• Capital Expenditure Planning
• Quantity Surveying
• Strategic Asset Management
• Building & Sustainability Consulting
• Property Depreciation

In the last year Napier & Blakeley

It’s rare to find nothing that would be considered problematic for an incoming owner, but the last few years there have been a few issues that have become commonplace through either lack of ongoing investment and maintenance or as a result of new market legislation.

The GFC brought substantial financial constraints to the entire economy but for property owners it brought pressures through loan to value ratios (LVR’s), reductions in value and rental income. This created a catch 22 situation where many knew they had to keep maintaining and spending capital to keep their assets compliant, relevant and therefore rentable, but were unable to directly fund or borrow funds to do so.

We recently re-analysed an asset that we had prepared due diligence and capex forecasts for a few years ago, and the list of items that we identified in our initial report were almost completely the same as now. Nothing had been fixed, maintained or repositioned. So, many years down the track the asset has fallen deeper into redundancy and therefore costs more to rectify.

The other more recent trend that has pretty well become standard during due diligence is the of analysis of energy consumption and modelling future asset potential to reduce energy. This trend is driven by rent, NABERS disclosure legislation and also with the future cost of energy in mind.

Over the last 2 years the federal Government ran the Green Building Fund initiative which provided up to 50% of the expenditure required by an owner to sustainably retrofit their asset.

This initiative was worth approximately $120m so therefore an overall value of retrofitting projects of $240m. We estimate conservatively that there could be well in excess of $2b worth of retrofit requirements, especially when you consider that 35-40% of the rental marketplace are Government type tenants that require minimum 4 to 4.5 star NABERS rated assets to lease. As an example, there are many Premium and A Grade commercial offices that are substantially below that level of rating, some hovering at around a 1 star NABERS rating.

Contact

If you want further information on due diligence and capital expenditure forecasts, or any other Napier & Blakeley services please contact any of our offices below:

Melbourne - Rob Howells            03 9915 6300             rhowells@napierblakeley.com
Sydney – Gavin Peach                02 9299 1899              gpeach@napierblakeley.com

Napier & Blakely services:

• Technical Due Diligence
• Capital Expenditure Planning
• Quantity Surveying
• Strategic Asset Management
• Building & Sustainability Consulting
• Property Depreciation

The purpose of the Premises Standards (and corresponding changes to the Building Code of Australia and State / Territory Building Law) is: 

• To ensure that dignified, equitable, cost-effective and reasonably achievable access to buildings, and facilities and services within buildings, is provided for people with disability, and
• To give certainty to building certifiers, developers and managers that if standards are complied with they cannot be subject to a successful complaint under the DDA in relation to those matters covered by the Premises Standards.

1.  General Application

The Premises Standards will apply to all new buildings and to extensions or additions to existing buildings.

In most circumstances it will also be necessary to provide an accessible path of travel from the principal public entrance to the new or modified part of an existing building.

2.  Physical Elements

Physical revisions or changes will be made in certain areas including:

• Access and egress
• Signage
• Lift installations
• Sanitary and other facilities

3.  Exemptions

There are exemptions to compliance with the Premises Standards such as in cases of unjustifiable hardship.

Unjustifiable hardship is not defined in the Act or in the Premises Standards and therefore is dependant on the specific circumstances in each case.

The Premises Standards provides a list of factors that may be taken into account in determining whether there is an “unjustifiable hardship” including cost, loss of value, and impact on revenue, technical building factors and benefits of access.

It is highly unlikely that the mere imposition of additional cost is sufficient to find an unjustifiable hardship.

4.  Compliance

Compliance will be achieved principally through the normal building certification process and therefore if buildings are designed and constructed according to the requirements of the revised BCA, compliance with the Premises Standards and the Act should be achieved.

5.  Non Compliance

The Premises Standards do not specifically set out penalties or consequences for failure to comply. However, there are likely to be a number of serious consequences including:

• Inability to obtain building approval if non compliant with the Premises Standards; and
• Where the premises is constructed, the possibility of a claim of discrimination.

Contact

If you want further information on how these new Disabled Access Standards will apply to your new constructions, building works or alterations, or any other Napier & Blakeley services please contact any of our offices below:

Melbourne – Rob Howells
03 9915 6300
rhowells@napierblakeley.com

Sydney – Gavin Peach
02 9299 1899
gpeach@napierblakeley.com

Napier & Blakeley services:

• Technical Due Diligence
• Capital Expenditure Planning
• Quantity Surveying
• Strategic Asset Management
• Building & Sustainability Consulting
• Property Depreciation

Lack of Capital post GFC has lead to a significant neglect of R&M and Capex spend.

Having worked on property due diligence valued over $10B since the GFC, Napier & Blakeley have seen only nominal spend on upkeep compared with previous years.

Risk of Non-Compliance (i)

During this period the increasing trend has been a notable reduction of Repair and Maintenance (R&M) and Capital Expenditure (Capex)  budgets. Whilst this strategy may have been necessary in some circumstances e.g. postponement of non-essential Capex, we have found too commonly evidence of non-compliance regarding statutory maintenance such as testing, auditing and reporting of essential safety measures and fire safety systems.

Reduced Life Expectancy and Premature Capex 

Recent technical due diligence and condition assessments have also found that the lack of R&M and Capex budgets for economic life driven plant and equipment overhauls and refurbishments has resulted in increased short and medium term Capex.

To put this in context, without appropriate R&M, major plant items may have an economic expected life of (say) 25 years, however, the reduction or removal of maintenance can result in a major shortfall in expected life to around 15 years.

The Reaction

Astute purchasers have become aware of this risk and look for these patterns in their technical due diligence reporting to ensure that appropriate Capex costs are factored into the purchase price to account for a vendor’s R&M expenditure shortfalls.

Condition assessments, maintenance reviews, energy assessments and risk weighted strategic Capex forecasts have become 2010’s essential tools for good asset and facility management and sustainable property solutions.

Risk of Non-Compliance (ii)

Legislation requires that most commercial office property will be required to have a formal energy performance rating in the next few years and many will require this imminently or in the next few months.

This Legislation has caught most by surprise.

For purchasers and owners it is now important to understand where a property currently sits from a formally rated energy performance perspective.

It is also important to understand how the rating can be maintained at the same level over a period of time, and how it can be strategically and cost effectively improved to avoid future obsolescence.

The Building Energy Efficiency Disclosure Act 2010 is on the cusp of taking effect. The transitional provisions (1 November 2010 to 30 October 2011) require the disclosure of a building’s energy performance through a NABERS Energy base or whole building rating, for all commercial office property with a net lettable area of 2,000m² or more that is offered for sale or lease. However, with only 388 commercial office buildings registered nationally to date, it would seem the message may not have reached all concerned parties with property interests that fall under the Act’s disclosure requirements.

Anxious Vendors

With fines in excess of $110,000 for breaches of the Act’s obligations; including advertising the property for sale or lease, after 1 November 2010 without an appropriate NABERS Energy rating, there is significant anxiety in the market place.

The latest information from the Department of Climate Change and Energy Efficiency (DCCEE) will surely increase anxiety levels, as they have confirmed that neither exemptions nor extensions will be granted for lack of knowledge or where assessments are currently underway but not yet completed.

It will be interesting to see how owners, selling and leasing agents and DCCEE react.

Astute Purchasers

The story doesn’t end once the rating has been achieved. Purchasers want to know about the processes and procedures that owners have in place, the potential risks of maintaining the rating at the current level and what plans are in place, or could be implemented, to improve the rating, perhaps strategically in line with planned Capex or future lease expiries. Such initiatives are considered in terms of funding opportunities, reduced energy costs, pay back periods and commercial outcomes.

For more information on Technical Due Diligence, Capex Forecasts, NABERS Ratings and Sustainable Property Solutions contact Napier & Blakeley.

NSW / ACT / WA / NZ  -  Alastair Walker  -  02 9299 1899
VIC /  SA  / TAS  -  Peter Frith, Rob Howells -  03 9915 6300

Concrete has been the main stay of building construction for generations. Today, traditional reinforced concrete is an integral and important component of building structures. It usually takes the form of footings in ground, slabs on ground, columns and suspended slabs.

Concrete however, is not the perfect substance. As such it can suffer from defects. These defects can have a huge impact on the appearance, capital expenditure, maintenance costs, safety and effective life of the total structure.

What then are the typical forms of concrete defects? Some of the more common defects can be categorised as follows:- 

• Structural design inadequacies – distortion, bending cracks, deflection, shear cracks, impact damage temperature change cracks, abrasion, torsion cracks and erosion.
• Environmental causes – weathering/staining, biological growth, bacteriological attack, efflorescence (lime leaching), freeze-thaw damage and fire damage
• Aggregate properties – aggregate swelling/shrinkage/softening, alkali-silica reaction and sulphide staining/spalling.
• Chemical attack – sulphates, chlorides, acids and salt weathering.
• Reinforcement corrosion – cracking, spalling and de-lamination 
• Concrete Cancer – cracking of the concrete caused by the corrosion of steel reinforcement in concrete structures

These defects are a significant worldwide problem and cause multi-billion dollar losses to infrastructure and building owners annually.

Reasons for the rectification of concrete defects can range from purely subjective (the aesthetics); to preventive (to prevent additional damage); to structural (preventing partial or complete failure); to safety (avoiding impact from falling debris).

As evidenced by the recent traffic disruption caused by structural cracking on the Riverside Expressway in Brisbane, one of Australia’s busiest stretches of road, the consequences (time, distraction and expense) of cracking concrete can be severe.

What then is the solution to problems caused by cracking concrete? The type of concrete defect rectification varies with respect to a number of factors: budgetary constraints, time limitations, weather conditions, and the requirement for specialised techniques.

In the specific case of concrete cancer, cracked concrete is removed followed by cleaning, treating and replacing any rust affected steel. The area is then repaired to the original concrete profile using cement mortar, epoxy mortar or concrete. This depends on the size of the damage and the structural requirement. Cracks are repaired using suitable epoxies, special mortars and injection techniques

While the rectification processes are usually expensive and time consuming, they are nevertheless an important step to take. Cracked concrete can have severe consequences, and if remain unchecked, associated costs can escalate significantly from both a repair, and damage control perspective.

Summer time is a great time to take stock of your business and a great time to think about and diarise some property housekeeping issues that quite often get overlooked in the bustle of normal day to day business.

However if you consider this now, you can plan to carry out some crucial housekeeping duties in January when business is traditionally quieter.

Some of the not so sexy but absolutely essential items to consider to maximise your return and minimise your cost and risk are as follows:

Property Replacement Insurance: given the sizeable increases in construction costs in recent times, have you considered whether your properties are correctly insured? Do you know what you are insuring: base building and / or fit out?

Capital Expenditure Planning: what items have you planned over the next calendar year? How will they be managed?

Maintenance: are your maintenance contracts up to date and appropriate? Are there any routine maintenance items that can be efficiently attended to in this quiet time?

Tax and asset updates: Is your base schedule correct? Have you carried out any upgrade works during the financial year to date for which you can claim either a tax write off or a future tax deduction?

Condition Audits: Do you need to create or update any condition surveys of your tenanted properties?

Tenancy Make Good: Do you have a schedule of lease expiries that will occur during the year? Are there any “repairing and make good” obligations that need to be planned with the tenant?

N&B can assist with all of the above to help you really enjoy your summer holiday.

A number of our articles have covered a variety of individual topics in isolation but in reality they’re all inextricably linked providing the platform for balance and maximum return from your property investments.

Our affordability index provides an amalgamation of a variety of property information to provide a balanced look at how your asset might perform over a period of time and how you can influence that performance.

Whether the investment is residential or non residential the same basics apply –

§          How much is it going to cost me

§          What risks are involved

§          What return will I secure

These questions then have multiple layers – how much is it going to cost me initially and in the short and long term, what kind of costs are they, capital, repairs and maintenance, refurbishment or compliance costs. What must I do legally, what must I spend to benefit and retain the tenant.

What risks are involved, physical, compliance or tenant retention, who ‘makes good’ the space at lease expiry.

How do I maximise and maintain my return and are there development opportunities that will add value to the property.

If you consider all of these questions in isolation they provide some useful information.

But only by considering all these issues at once you can create a clear picture of how your asset will perform over time, therefore providing certainty, clarity, sound information for a financier and a great platform for your accounts.

As an illustration, a commercial investment property is purchased for $5,250,000 the initial return is 8% with annual rental at $420,000. The property has 1,500m2 net lettable area and is ten years old.

A lease is in place for 5 years with fixed rental increases of 4% so at lease end – the possible value of the asset at 8% is $6,142,000.

Not a bad gain over five years if you can achieve it.

However, in addition to debt costs over the lease period, a building of this age will also have other costs associated with ownership over time and these need to be considered, planned and managed to keep the property aesthetically and functionally attractive beyond the current five year lease. No future lease – substantially less future value.

The pre acquisition due diligence study provides details of the risk factors associated with the property and notes that the related capital expenditure and repairs over five years is likely to be between $350,000 and $400,000 to carry out works such as Building Code compliance issues, replacement of floor coverings, services upgrades, painting and general upkeep.

The cost of capital works and repairs are tax deductible against income but obviously they also have a recurring cash flow impact.

Offset against ongoing costs of ownership are the tax deductions available for building allowance and plant depreciation deductions for the initial acquisition and again for additional capital expenditure throughout ownership. These deductions provide additional cash flow and after tax dollars to fund any upgrade works to the asset.

The affordability index captures all of the above information and allows you to:

§          Understand, plan and manage all costs associated with ownership.

§          Manage all risks associated with ownership.

§          Manage your true return proactively, by controlling cost and risk and capturing efficiently all available tax benefits.

So not only can you afford it, you can maintain a solid return as well with no surprises.