The customization of an industrial property is achieved through the integration of the real estate, its established and new property improvements owned by the landlord, and the machinery and inventory of the tenant. This relationship can occur as part of the lease negotiations between the tenant and the landlord.
If the customization of the plant and equipment is going to be extensive and elaborate, the terms of the lease will need to be suitably and carefully constructed. It is important to identify the different levels of plant and equipment that are owned by each party. The lease document is the place to do this.
If costs are to be incurred by the landlord in modifying the plant and equipment and to help the tenant in establishing occupation, then the initial property modification costs should be amortized across the lease term. Any money outlay by the landlord should be built back into the income recovery.
You can calculate the cost recovery alternatives through a discounted cash flow with appropriate rental recovery assumptions across the initial lease term. The rent reviews and the market rentals to be charged during the initial lease term can be modified for recovery of amortized costs.
Distinguishing the Differences
It is often difficult to distinguish between the plant and equipment owned by the tenant, and that which is owned by the landlord. For this very reason, any new lease should clearly detail the ownership factors and the maintenance factors that apply to the existing plant and equipment within the property.
The landlord may own some of that plant and equipment; however the maintenance may be passed across to the tenant as part of ongoing occupancy. The lease document is the way to detail this factor. It is then up to the property manager to ensure that the appropriate levels of maintenance occur during the lease term.
Clear definitions and relationships need to be set when it comes to leasing a complex industrial property with complex cross ownership structures of the plant and equipment.
Generally speaking, the costs incurred in establishing new plant and equipment within an industrial property will have some advantage in depreciation when it comes to taxation. Clear relationships need to be set between the tenant and the landlord as to the initial cost outlay and the application of depreciation.
Any property landlord should consult with their financial adviser before they make the final decisions on capital costs incurred in a new or established industrial property.
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