Impact of Variable Outgoings to Tenant's Bottom Line
These days, a majority of the commercial and industrial premises that are on the market are offered on a “net lease” arrangement. Basically that means that in addition to the base rent, the tenant is also liable to reimburse the Landlord for the majority of any costs related to the property.
Besides statutory responsibilities such as rates and taxes, insurance and emergency services levy, additional contributions could be required of the tenant for other expenses such as; the cost of management, common area maintenance, strata levies, public lighting, HVAC maintenance, etc. All of these items are incorporated and are known as variable outgoings.
In order to reduce pressure on the tenant’s cash flow and control and monitor the level of the expenditure at the same time, very often the annual variable outgoings costs are estimated and recovered from the tenant through equal monthly contributions. At the end of the financial year, the landlord is responsible to prepare a written report including comparison of all the actual expenditure for the year against the estimated figures (more about that in upcoming articles).
All of the above serves as a preamble for this article. As a result of the current economic climate and the significance of the cost involved (sometimes variable outgoings exceed 20% of the total cost of leasing), it is critical that the tenant has a firm and clear understanding of his/her full financial obligations in relation to the lease.
Below are three concerns involving variable outgoings that could force a prospective tenant to reconsider their leasing position:
- Due to the combined effect of ever rising taxes and charges, the annual increase in variable outgoing contributions could be higher than that of the increase in the base rent (for example , variable outgoing increases could be more than 5% while the annual base rent increase could be 3.5 or 4%). That could be very significant for the tenant’s cash flow projection for the next accounting period.
- When it comes to brand new commercial or industrial premises, some expenses incorporated in the leasing documentation and acknowledged as the tenant’s responsibility are unknown at the time of the leasing negotiation (i.e. Strata fees or lift maintenance cost). A ‘bad guess’ (estimate) figure could further influence the tenant’s bottom line (The annual audit of the outgoings is going to pick up the discrepancy).
- It is imperative that all items included in the variable outgoings are clearly presented in appropriate form by the leasing agent (Disclosure Statement) and supported by matching documentation! Skipping and rushing through this part of leasing process can be a bone of contention later on and could damage a good relationship.
The point that we are trying to make is that a successful leasing arrangement between the landlord and the tenant(s) requires transparency, patience and knowledge applied throughout leasing negotiation by the leasing agent and is a key
OUR common sense – Key for YOUR success!
