The commercial real estate sector had some interesting challenges in 2020 due to COVID 19. Some sectors were heavily affected with downturns while other industries experienced exponential growth across new and existing markets.
Commercial buildings in the CBD that were previously filled with the hustle and bustle of office workers stood empty. Retail, fitness and hospitality businesses were forced to close their doors due to the restrictions – everyone doing their best to keep our communities safe.
Businesses also developed new ways to operate under the restrictions. The office sector rolled out significant changes in setting workers up at home with cabling, office equipment, computers, desks and chairs. There were changes to business layouts and workstations to adhere to the 1.5 metre distancing ruling as well as 4sqm and 2sqm restrictions. Many businesses even chose to let go of their leases as they couldn’t sustain the businesses outgoings.
There was an increase in commercial property vacancies and owners were left wondering how to hold onto the property. Many investors opted to complete a refurbishment, where they could – some changed the office space into residential living and some diversified and invested in commercial properties such as childcare.
JLL recently stated:
‘The pandemic shook up commercial property in 2020, halving transaction volumes from a year earlier, as the market took a breather on transactions between March and July, when much of the country was in lockdown. But as it bounced back it set the stage for several themes that would play out this year, Mr Ballantyne said.
The pandemic also pushed many investors to expand into alternative assets, such as childcare, healthcare and data centre property, which were less tied to the broader economy than mainstream commercial sectors such as traditional office space.
Below we take a look at our client’s different commercial property pandemic scenarios and how they were each affected. Just some of the scenarios we have seen in the last 12 months are a commercial property being vacant for 6 months, an investor choosing to diversify, one landlord changing direction and another completing a refurbishment during the pandemic.
Case Study – Office space left vacant
Our client John purchased a 401sqm office space in 2018. There were 4 years remaining on lease at the time of purchase. John’s leaseholder had to break the lease as they were severely impacted and could not operate during the pandemic.
John was unable to find a tenant for 6 months. However, due to the property being available for income producing purposes and John actively seeking a tenant, he could still claim his $21,457 in tax depreciation deduction. This helped significantly with cash flow at that difficult time.
Case Study – Adding commercial property to diversify portfolio
Our clients Lin and Chen have a portfolio of 11 residential properties. They chose to diversify during the pandemic and purchased an industrial warehouse in May 2020 that was leased to a local courier company.
Unlike their residential properties (all purchased after 2017), with this new commercial investment they are entitled to claim the plant and equipment items included at purchase such as fire services, lighting, air-conditioning, floor coverings. Lin and Chen were pleasantly surprised at the significant deductions they were achieving.
Case Study – Refurbishing an office space
Jenna and Tim purchased a 286 sqm office space in February 2020. The office space had an existing fit-out that was tired and out-dated. Jenna and Tim were completing an update to freshen up the place. Then the pandemic hit. This caused them to reassess their plans and change direction.
Tim has a background in the medical field, so he and Jenna decided to transform their office space into a medical centre. Jenna and Tim were able to claim the tax depreciation deduction on their new medical centre fit-out plus they scrapped $24,885 by disposing of the existing out-dated office fit out:
Commercial Property Tax Depreciation
Above are just some of the many scenarios that can occur but they do highlight many key points about commercial property depreciation and how claiming for depreciation improves cash flow (particularly helpful during difficult market conditions such as those experienced during the pandemic):
- As long as a commercial property is available for rent, the owner is entitled to claim the tax depreciation deduction even if the property is not tenanted;
- Commercial properties are able to claim the tax depreciation deduction for existing plant and equipment items unlike those residential properties affected by the 2017 budget changes;
- If there is an existing fit-out that is outdated and a refurbishment is completed, the owner or lessee is able to claim the residual depreciating amount for those items that have been disposed of – this is often referred to as scrapping and can total thousands, if not hundreds-of-thousands in tax depreciation deductions.
All of the above help commercial property owners and lessee with cashflow during a pandemic.
If you would like to discuss your commercial property in more details, please call our Senior Tax Depreciation Specialist Alex Konjarski on 1300 922 220 or email him at firstname.lastname@example.org.