Comprehensive and Detailed 150 to 250 words of Explanation From [Microsoft Azure Administrator/Course Guide/topics]:
The correct approach is to create a parent ARM template that references Template1 and Template2 as linked templates . Microsoft's ARM guidance states that complex solutions can be broken into related templates and deployed together through a main template; linked templates remain separate files referenced from the main template, which preserves modularity and reusability.
This also solves the cross-template dependency issue. Microsoft states that dependencies can be set between nested or linked templates, and if resources in one linked template must exist before resources in another, the second linked deployment can depend on the first. A simple dependsOn on the VM extension inside Template1 is insufficient because ARM dependencies are evaluated for resources deployed in the same template context; the documented dependency behavior is that Resource Manager deploys resources in dependency order and otherwise deploys them in parallel.
Adding Template2's resources into Template1 would violate the requirement that both templates remain separate and reusable. This aligns with AZ-104 Deploy and manage Azure compute resources , specifically Automate deployment of resources by using Azure Resource Manager templates or Bicep files .