Costs of Leasing Commercial Property
In commercial leasing transactions there are various expenses (some monthly, some once-off) that need to be considered when trying to assess the affordability of a new business premises. It is very important that tenants have a clear understanding of the costs that they can expect to incur so that they can accurately assess whether or not a particular transaction will be affordable for them for the full duration of the lease.
In addition to the basic (or net) rental figure, there are other costs related to the operation and maintenance of the property – commonly referred to as “ops costs”. These operational costs generally include charges security, cleaning, landscaping and general day-to-day maintenance of the premises. This amount is calculated by the landlord and usually charged pro-rata on a per-square-metre basis.
As an example, if your office occupies 100 square metres of a 500 square metre block and the monthly operating expenses for the block are R10 000 per month, the ops costs work out to R20 per square metre (R10 000 / 500sqm = R20/sqm). You will therefore pay R2 000 per month (100 sqm x R20/sqm = R2 000).
Municipal Charges and Utilities
Municipal charges and utilities will also be a significant monthly expense over and above the rental and ops costs. In a multi-tenanted building, the rates, refuse removal, air-conditioner maintenance, sewage, and common area lights and water are usually split between the tenants on a pro-rata basis and charged in arrears.
Thus, if your office space accounts for 10% of the lettable area within a building, you will be liable for 10% of the municipal charges. For a standalone office, the tenant is generally liable for the 100% of the municipal charges.
In addition to the common water and electricity charges (which are for common areas such as kitchens, passages, parking areas etc.) there will be charges for the electricity and water consumed by the tenant for their specific office space or unit. In most multi-tenant buildings, the offices will have individual electricity meters for each unit. Depending on the layout of the offices and the building there may in some instances be individual water meters, but often the water account is split pro-rata between the tenants.
Parking costs can costs can also be a significant contributor to monthly property expenses. Parking bays can range from R250 per bay for an open bay, up to R750 per bay for a secure basement bay in an upmarket building. Landlords are usually willing to negotiate on parking, dependent on a range of factors (e.g. number of bays required, size of office, length of lease, strength of tenant etc.)
It is also important to take the annual escalation rate into consideration when trying to determine the financial viability of lease. Escalation rates are generally in the 8-10% range, although these can fluctuate depending on the length of the lease. In a longer term lease (+3 years) the tenant may find the landlord more willing to settle for a lower escalation rate. This escalation rate usually applies to the basic rental rate and parking.
With regard to municipal increases in rates, the tenant is usually obliged to pay a pro-rata portion of annual municipal increases. This amount is therefore likely to fluctuate, depending on the municipality’s prescribed rates for the year.
Although deposits will be refunded at the conclusion of the lease (except for where there are outstanding monies owed by the tenant or other extenuating circumstances) it is still important to take this amount into consideration as the deposit money will be inaccessible to the tenant for the duration of the lease. Generally, a double deposit is required (2 x monthly rent incl. parking, ops costs and rates) although this amount can change depending on the tenant’s credit rating and history. Given that the deposit can amount to a couple of months’ rent and that the first month’s rent is payable in advance, the deposit can have a notable impact on a business’s cash-flow, particularly smaller businesses and those operating on tighter margins.
Some landlords will hold the deposit in an interest-bearing account upon request so that the tenant can earn interest on the money. Alternatively, the tenant may in some situations provide an irrevocable bank guarantee. This allows the tenant to “keep” the money in an interest bearing account with their own bank, but the funds will only be accessible to the tenant upon conclusion on the lease.
It is important to establish whether the quoted amounts for an office are inclusive or exclusive of VAT, especially for non-VAT-registered businesses.
Lease administration fees are often charged by the Landlord and/or Agency. These fees are for the costs of drawing up the lease, processing of FICA documentation, vetting of the tenant and conducting credit checks. This amount can range from a few hundred rand up to a couple of thousand rand and so it is important to establish what these charges will be.
Moving and Fit-out Costs
The cost of moving to and renovating the new premises can also be a significant expense when relocating your business. Reputable moving companies will be able to provide quotes for moving your office furniture and equipment.
Fitting out the office is an important expense that can be easily under-estimated. It is advisable to try and get some estimates or quotes on the work required to prepare your new commercial space for occupation. Carpets alone can often cost over R200 per square meter. On top of that there may be partitioning, painting, IT and electrical infrastructure and equipment that’s required.
Reputable Landlords should offer a Tenant Installation Allowance or Beneficial Occupation period to assist the tenant with these expenses, but this is not mandatory and will often depend on the terms of the lease such as length of lease period and size of premises. You can learn more about this in our article on Tenant Installation Allowance and Beneficial Occupation.
In conclusion, it is important to establish all of the costs that your business can be expected in incur before committing to a lease. An experienced and diligent broker will be able to guide and advise you with regard to these expenses and assist in negotiating with the Landlord to formulate a deal that will be fair to all parties. To find out more and get advice on relocating your business, please get in touch with Vertical Spaces Properties today!
Author: Richard Abrahams