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Lease security gets a modern makeover

Asset owners tired of traditional bond-age look to digital security technology for efficiency and cost savings.

Anchored by the essential components of trust and security, the traditional concept of the commercial rental bond is experiencing an evolution, fuelled by growing demand amongst New Zealand’s landlords and tenants for more efficient use of capital and paperless administrative processes.

Kevin Miles, commercial finance specialist at financial advisory and debt brokerage firm Vega, says more challenging economic conditions and the impending general election have given commercial landlords and their tenants a new lens to examine efficiencies within business models.

“Given variable policy in the current high-interest environment, access to equity and bank lines are essential for businesses to operate efficiently, and stakeholders are constantly assessing their cashflow position in search of efficiencies.

“Asset owners are currently focused on safeguarding the value of their properties by harnessing new technology, which can also better secure tenants’ lease obligations by incorporating the use of digital tools which promote effective and expedient management,” he says.

RENTAL BONDS IN THE DIGITAL AGE

Miles says one such area receiving a modern makeover is commercial rental/lease bonds.

“Historically, security deposits and bank guarantees have been the primary tools to safeguard landlords against property damage and unpaid rent.”

“However, the landscape is changing with the advent of digitised commercial rental bonds – a solution by eGuarantee which is becoming popular as an alternative to traditional security retention methods.”

Global financial technology innovator eGuarantee has developed a smart commercial rental/lease bond solution which is gaining international momentum.

It is utilised by public and private landlords ahead of cash deposits and bank guarantees, as well as Government agencies in Singapore and Australia.

“Vega has partnered with eGuarantee to access their smart commercial rental/lease bond solution, which provides straightforward and cost-effective alternatives to secure commercial lease obligations without taking up bank lines or locking up significant amounts of cash in security deposits.

“Landlords and tenants can now use eGuarantee’s digitised lease bond solution issued by Assetinsure, an Australian and New Zealand insurer, underwritten by a syndicate of six international insurers with an AA/A- credit rating,” says Miles.

“In essence, the same credit standing as the big four banks operating in New Zealand.

“As with a bank guarantee, the bond is irrevocable, payable on demand, and unconditionally provided for the lease term, whether the tenant pays the annual premium fee.”

UPSIDE FOR TENANTS AND LANDLORDS

As a digitised obligation, landlords and their property managers have more options for managing cash deposits and guarantees.

“They will still receive the same comfort of an irrevocable on-demand payment obligation, which lasts the lease term, underwritten by the syndicate of international insurance companies.

“Users will utilise e-processes on eGuarantee’s platform, with an automatic diary system up-stamping to ensure the security remains current until the lease matures.”

Miles says digitised commercial lease bonds also have the potential to alleviate vacancy periods.

“Traditional cash deposits can deter to potential tenants, given the financial burden of a lump sum payment.

“E-processed lease bonds, however, provide a less capital-intensive alternative for potential tenants, which is more appealing for a broader selection of occupiers.

“This can ensure reduced vacancy periods and an augmented rental income for landlords.”

Similarly, tenants stand to gain substantially from the paradigm shift towards lease bonds.

“The financial relief at the commencement of a lease is an immediate advantage for tenants.

“Instead of a hefty cash deposit or obtaining a bank guarantee, tenants pay a fraction of the deposit amount as an annual premium for the lease bond.

“This lightens the financial load and preserves tenants' valuable capital for other essential business expenses – all the more valuable on a contractionary economic phase.”

Miles says that digitised commercial lease bonds, through the eGuarantee platform also expedite tenants’ transition between rental properties.

“With e-processes, tenants no longer wait for the return of their cash deposit and bank guarantee - which could take weeks. A swift transition eliminates unnecessary delays and ensures a seamless move to new premises,” he says.

A SIMPLER WAY FORWARD

The process of obtaining a commercial lease bond from eGuarantee is straightforward, Miles says.

Tenants are invited to apply for the bond through Vega – which is eGuarantee’s brokering partner and 50 percent owned by Bayleys Real Estate.

The application process will evaluate the prospective tenant’s financial credentials. Once the issuer has approved the applicant, eGuarantee will seek the approval of the landlord.

The defining feature of lease bonds is the absence of security requirements. Following approval, the tenant will provide the bond issuing entity with a counter indemnity. The minimum bond amount is set at $50,000 and is provided for the entire lease term.

The cost structure involves tenants paying an annual premium, calculated as a percentage of the bond amount, plus an initial set-up cost.

Annual premium rates are 5.5 percent for bonds between $50,000 and $200,000, with scaled-down rates for higher bond amounts, as determined by the underwriters.

“This cost-effective approach benefits both parties, facilitating a more harmonious landlord-tenant relationship,” Miles says.

Kevin Miles is a commercial finance specialist with Vega based in Auckland with an international retail and investment banking background.

Contact him directly if you would like to discuss this product or more specific needs. kevin@vegalend.co.nz | 029 2022 102

For further information, visit https://vegalend.co.nz/bond/

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