“In the dark” on leased apartment

Question from Rodney updated on 16th March 2015:

I am looking for an apartment to buy and live in and I found Sebel Hotel in the Viaduct very cheap, at $139,000. It's very nice and spacious. The problem is that I don't know much about serviced apartments. The management contract for hotel expires in 2020 at which the real estate agent told me I could occupy the apartment after six months of purchasing if I applied. basically Im not sure about the details of owning such an apartment compared with a residential apartment. Í dont want to find hidden costs'. Or I don't want to have to renovate apartment every 10 years. I am in the dark about the lease as there are two, the ground lease and hotel lease. Is the apartment a technical situation because it's a hotel or is it strait forward as opposed to residential apartments? Do I own the apartment or does someone else own it? Are there any hidden costs? What happens when the hotel moves out? I'm in the dark with these hotel apartments.

Our expert Krister Samuel responded:

As with any investment it pays to have an open mind and thoroughly do your research before buying. Firstly, this apartment appears affordable as it has a leasehold title. Now whilst that may disinterest some, its leasehold in perpetuity structure is the most stable and predictable out of all the five different types in central Auckland. So with understanding, not necessarily a deal breaker. You own the leasehold title and pay annual ground rent to the land owner (this is the ground lease). The apartment is then leased to the hotel (this is the occupation lease) who pay you rent as you would expect from a tenant. The trick with hotel tenants like this is to negotiate an agreed fixed rental paid monthly rather than rely on being paid as or when a hotel guest actually stays in the apartment. The occupation model is prone to be wildly varied month to month. The leases are normally written in plain English so you simply need to find the time to read through it. The hotel may be offering different terms to different apartment owners in the same complex so it's important to read the specific, signed and dated lease that relates to this apartment. Furthermore, as the hotel is a commercial operation its lease attracts GST to the apartment. You must be registered for GST to purchase the unit. You must pass on the GST to the IRD on rent paid to you. If the hotel moves out you must pay 15% of the apartment’s value to the IRD. Do not sign an agreement to buy the property until you understand this issue the implications of a mistake are savagely expensive. In summary, many moving parts to understand but if you can get your head around them it’s a great apartment in a superb location.

Krister is ranked in the top 1% of all real estate agents nationwide and specialises in the high yielding Auckland apartment market. He is happy to share insights and information on any aspect from an extensive knowledge base built up over a decade.

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