Who's afraid of the old cross-lease? With Careful research, cross-leases can be a good start on your investment journey.
There are some phrases that have many property investors bolting for the door at an auction, and one of those can be “cross-lease”. Yet in my opinion, cross-leases can prove to be a better starting point for an investment than any other residential property purchase, with the potential to increase value between 6-16% without doing much more than fixing the title. If you’re based in Auckland, that is typically a yield of $150k for a title conversion cost for two units to freehold at a cost of approximately $40k ($20k per title).
Why are there so many cross-leases?
In the 1950s, cross-leases were used as a “non-subdivision’ method to get a separate title for multiple units sharing the same land, whilst avoiding the costly contributions and council regulations at the time. The ownership is a form of tenure whereby multiple individuals own an undivided share of land and lease this from the other owners, usually for a term of 999 years. The rules were aimed at multiple apartment blocks, but allowed for full sized dwellings to be built under these terms as well. As co-owners of the land, all holders of the lease have a say in the development of the land, and of any changes to the properties that sit on it.
Who’s afraid of the old cross-lease?
If you‘re a first time investor looking to get started on the property market, cross-leases can have a number of pitfalls that you will want to avoid. Many people don’t realise that converting a cross-lease is actually a full subdivision in the eyes on the council, and part of this is redressing the regulations that were avoided when the cross-lease was set up. There is a great deal of information required from councils around drainage and land use which may need to be changed before a subdivision can even start. Here are my top three recommendations:
- Get neighbours on board early. You can’t proceed without neighbour consent, and some neighbours may be reticent as to what changing to freehold could mean for them, especially with the changes coming to the RMA later this year. There are ways to manage their concerns with covenants on the land that would still allow for increased value of both properties at resell.
- Start with drainage. Drainage will be your go/no-go decision point for proceeding with a cross-lease subdivision. You will need CCTV investigations and reports into drainage and for some conversions council require a new common drain or drainage repairs, the costs of which can be excessive. For some people a title conversion will stop there unless you have plans to further redevelop the freehold land once the subdivision has been completed and can justify the additional costs. Check the full costs of drainage compliance and talk with your surveyor about how to best present recommendations to council.
- Find a surveyor or specialist cross-lease conversion consultant that understands and works closely with your council. They will be able to advise you on the approach and help you to avoid unnecessary reports or costs that might not be required as part of your title conversion.