relevant outgoings encountered in such leases are summarized below:
Land tax is included
on either a single or a multiple holding base. A multiple holding
base (that is, the actual land tax being charged the owner) may
result in a large increase in statutory outgoings. In, some states
such a South Australia, legislation. prohibits the passing of land
tax onto a retail tenant.
This outgoing is the
cost of providing light and power to the common areas of the
The management fee is
a percent of the gross income less vacancies for example:
buildings: 1-3% pa.
times of "keen" competition the fee will be towards the
lower end of the scale and may be less for very large buildings.
fee, wages, labour on costs, materials including uniforms and
This is an outgoing
somewhere between a capital and an ongoing cost. The period of
replacement depends on the mix of synthetic and wool materials in the
carpet but typically, should be replaced about every 5 7 years.
The annual operating cost is found by calculating an annual Sinking
OF CARPET AND REFURBISHMENT
Sinking Fund formula is:
= i/((1+i)n 1)
= sinking fund contribution to replace $1 of the expected cost in "n"
= interest rate as a decimal
= number of years.
SFC factor is multiplied by the expected cost to determine the annual
cost of replacement. The sinking fund method can also be used to
calculate an annual equivalent for refurbishment and redecorating
that has a life substantially less than that of the building, for
example, about 10 15 years.
large buildings this cost should be for materials and parts only as
maintenance staff are employed under "labour" above. On the
other hand, for smaller buildings it will be a contract rate. This
outgoing is a function of age, condition, design and complexity of
the building. The "actual" repair outgoings paid by tenants
may be erratic as occasional costs such as redecorating,
refurbishment, new plant and machinery, and carpet replacement
("capital items") are often and wrongly charged against the
tenants in one year.
valuer should ignore such costs, as they are items of capital with a
life approaching that of the building or (as in the case of
refurbishment) over a long period. The age of plant and equipment is
important, as the "economic depreciation" of modern plant
is high because of rapidly changing technology. That is, it may
require replacing in the near future despite being mechanically sound
as it is (or soon will be) economically obsolete.
extent of the lessee's obligations varies from simply having to
replace light bulbs to repairing roofs and walls. There is a critical
distinction between a "structural repair obligation" and a
"non structural repair obligation". Look for these words in
the lease document. Also "having regard to the condition of the
premises at the commencement of the term of the lease" and "fair
wear and tear excluded."
these provisions the lessee's obligations are far greater than merely
keeping the premises in reasonable condition as they get older. The
expense of renovation must be taken into account if these provisions
are missing. This item includes all running costs for lifts and
escalators including contract fees, wages and materials. The total
cost of all building repairs and maintenance excluding that for air
conditioning and ventilation and for lifts and escalators. Including
electrical, general, lamps and tubes, locks, keys including card
keys, painting, plumbing, structural and emergency systems.
cost of pest control including the treatment of carpets and records,
termite, insects and vermin. In a typical valuation pest control
items are included in "cleaning."
state, and water/sewerage authority’s rates. In NSW water and
sewerage rates are based on the Assessed Annual Value (AAV) which is
the value of the gross annual income less 1/10th. State land taxes
are based on the land or site value.
advertising and promotion, legal fees and postage and sundries.
is the normal annual cost of advertising for new tenants during
periods of vacancies. Advertising and promotion costs are quite high
during the initial "letting up" stage of a new building but
tends to fall to an even figure once the building is established.
a new building, the valuer should not use the higher initial cost but
instead, assume that the building is "established". This is
because the investor is concerned about the investment in the long
run. However when valued “as if occupied” a deduction should be
made for the letting up period.
figure for advertising and promotion of about 1% of gross annual
income after vacancies is sometimes used for commercial buildings.
CONDITIONING (MECHANICAL VENTILATION)
modern buildings have floor to floor (or zoned) air conditioning so
that individual lessees may operate their premises outside prescribed
hours. This is an important feature for a number of tenants for
example, financiers and heavy computer users.
are reluctant to take on any obligation with respect to air
conditioning and usually, the tenant reimburses the landlord for the
costs of running and maintenance. The outgoing is the total cost of
running and maintenance of all air conditioning plant and
ventilation. It is inclusive of applicable insurance premiums. It
includes the following elements:
- contract fee
(energy items have been included in energy accounts)
- oil Filters and
- water treatment
Licence fees , filler points Repairs.
all costs associated with car parking including signs, materials, and
wages. Excludes cleaning that is in PCA Account #250, lighting in PCA
Account #280 and air conditioning and ventilation in PCA Account
& OVERHEAD WAGES
all caretaking items including wages.
full cost of cleaning. Includes all items associated with cleaning
and rubbish removal, and cleaning by building staff. Sullage disposal
is a separate accounting item. In large commercial office buildings
it is usual for one contractor to clean the whole building and each
lessee is required to pay an apportionment of the total cost. This is
often dealt with as a separate item in the lease document.
AND GENERAL FEES
the following items:
All fees payable in
connection with the leasing of space within a building other than
advertising costs. Excludes initial legal fees that are in PCA
All fees paid to the
property manager for the management of the. building. Can be very
competitive and therefore, the scale fees are little guide.
All fees payable for
the negotiation of rent reviews.
All fees paid to
valuers for their part in rental determinations as either an expert
or an arbitrator.
all electrical items such as lifts, escalators, all central services
and light in the common areas.
AIR CONDITIONING MAINTENANCE
outgoing is the cost of maintenance and materials. Usually lifts are
covered by a maintenance contract with the supplier. For example,
the typical cost to run elevators might be $60 000
item includes all costs associated with fire protection and
maintenance. These include contract fees, replacement of detectors
and alarms, and repairs and tests to the system. Also includes costs
related to the sprinkler system, thermal alarms, equipment
inspection, and the extinguisher service. Do not forget that if
sprinklers are installed, then a lower insurance premium is payable.
OUTGOINGS AND CHARGES
cost of fixed outgoings is the cost of the external charges on the
property which normally, and because they external, cannot be changed
by the owner:
of government rates and taxes as detailed under PCA Accounts
OR COUNCIL RATES
total cost of all applicable local government rates and charges.
AND SEWERAGE CHARGES
water authority’s charge for water, sewerage and drainage.
from year to year. As per schedule. It is better to use the single
other government charges
owner should insure the property against damage from fire, storm,
tempest, fusion, burglar, workers compensation, public risk, plate
glass, riot and strikes, and loss of rent
"rule of thumb" is that insurance is about 0.2 0.5%
of the replacement cost of the building. Low rates are obtainable if
the property manager "shops around" for a comprehensive
insurance cover. On the other hand, the actual insurance may be on a
"bulk" basis if the owner owns a large number of
properties. In such a case, the cost should be increased to a typical
"single owner" basis.
cover must be a comprehensive cover including the following:
- fire including
- plate glass
are required to take out various policies and give various
that insurance premiums for a building with good fire control and
protection facilities is lower than a building with inadequate fire
control and protection features.
is the cost of maintenance and security staff. The number of staff
employed times a typical wage can estimate it. For example, $60 000
per employee (part time) per annum. Sometimes the provision of guards
is the tenant's responsibility rather for example, where one
government department or a bank occupies a building.
rent (if any) paid for the ground lease.