Tax a catalyst for tenant action

Tenants are being sought for leased floors on the Phillips Fox and former National Bank twin towers at 205 Queen St. Photo / Supplied

Firms weigh options before charge kicks in.

An increase in tenant activity is expected over the next few months as businesses weighing up their accommodation options look to finalise these before a significant tax change comes into effect.

From April 1, cash inducements received by tenants to enter into lease agreements will be treated as income and, hence, be subject to taxation.

Paul Hain of Bayleys Auckland says tenants that have been in the market for office space over the past 12 months are starting to focus on making a firm commitment to a new lease before the tax-free window closes.

"Any tenant, regardless of how long they have left on their existing lease, should be in the market now," Hain says. "Whether it is a case of extending the lease on their current premises, or relocating to alternative premises, it is advantageous for tenants to lock in for the long term, prior to April 1."

At present there is the double benefit for tenants in that they can get a cash incentive tax-free and if they use this to refurbish or fit out their office space they also have the benefit of being able to depreciate the works done over time, Hain says.

For example, if a landlord is offering a cash incentive of $3 million, this can all be spent on a refurbishment or fit out. After April 1 the net amount available to the tenant of the $3 million inducement after tax would be close to $2 million, Hain says.

Tenants should not be shy about committing to long leases and maximising the current benefits, says Hain.

"Not only is the tax change a consideration but we would also expect leasing incentives to start to diminish next year, as the balance of power in the market starts to shift in the landlord's favour."

Kiwi Income Property Trust is offering cash inducements as part of its leasing proposal in the twin towers Phillips Fox and former National Bank Buildings at 205 Queen St. ANZ/National Bank is vacating several floors mid-year.

The building features column-free floors and services comparable to any of the premium grade office towers in the CBD, says Hain. "The leasing packages are designed to be attractive enough to encourage tenants to sign up prior to April 1, 2013."

Under the tax change on April 1, any cash inducement will be treated as taxable to the tenant over the term of the lease, or the number of years until the first rent review if this is earlier.

PwC partner Mark Russell says the new tax will capture benefits other than straight cash payments, such as agreeing to meet the tenant's moving costs or forgiving another obligation the tenant has to the landlord.

While the latest new tax legislation has yet to be tabled in Parliament, it seems there will not be a consistent set of rules for all forms of inducement, says Russell.

"The time over which inducements are taxable will be different for cash incentives and fit-out contributions. Given fit-out contributions can be spread over 10 years, which is longer than many lease terms and rent review periods, we expect fit-out incentives to be tenants' preferred form of inducement from April 1."

Bayleys' John Church says incentives of whatever type are virtually a thing of the past for premium-grade Auckland CBD office buildings.

"Incentives on other CBD buildings are also decreasing rapidly to the point where we would expect they will dry up at some point next year, with the exception perhaps of poor-quality buildings in lesser locations.

"Incentives levels are driven by supply and demand, and despite all the bad economic news we read, the demand for office space has been steadily increasing for some time now. Also the supply of new office space, particularly in the CBD, has reduced significantly and with little in the way of new projects underway, it is only going to get tighter."

Church says the prospect of genuine rental growth is also on the horizon, particularly given the recent trend towards leases with stepped rental increases.