Commercial real estate outgoings?

It can be a bit complex when trying to work out what the real cost is every week when moving into new leased premises. Not only do you have the moving & fit-out costs. You also have the ongoing cost of rent but also have to work out the sometimes sophisticated methods of calculating outgoings. Many potential tenants & investors ask what Commercial real estate outgoings are and what outgoings are they required to pay with commercial property leases.

To get a general idea, I like to think of property costs from a taxation angle. If the expenses are deductible expenses within the financial year, they can generally be classified as repairs and maintenance, thus included as part of the outgoings. On the other hand, capital expenses such as a new roof or lift are generally depreciable assets over a period of years and are paid for by the property owner.

Please note this is a general test. We recommend you consult your solicitor and accountant to get full verification.

Commercial real estate outgoings can be described as the expenses incurred in the general maintenance and running of a commercial building. Depending on the negotiation of the lease agreement, most If not all of these outgoings can be recoverable in commercial leases from commercial tenants within the financial year.

What outgoings should be documented in the lease agreement?

To pass them on to the tenant, they must be adequately documented in the lease with the percentage of total property outgoings payable by each individual tenant.

Typically the commercial real estate outgoings Include the following expenses;

Building insurance

Body corporate fees/levies

Fees associated with the management of the property

General wear and tear repairs, as well as property maintenance and service contracts, such as the air conditioning, lifts, gardening costs, roof repairs etc.

Land tax (many leases have the landlord paying this property expense)

Water and council rates

Special garbage collection

Retail Leases are relatively similar to commercial leases and can be subject to alternative methods And conditions as set out and described in the retail leases act.

Types of Property Outgoings

Outgoings for commercial property is paid to the landlord in various ways as outlined in the contract of lease. The most common methods are the following;

Net lease

With this method, the tenant Is usually charged separately to the rent regularly. The term could be monthly, quarterly, six-monthly or annually depending on what was negotiated at the commencement of the lease.

This outgoing’s expense is usually calculated from the actual number of outgoings paid in the previous year. From this, a budget is given to the tenant for this year’s schedule. Throughout the year, adjustments as per lease can be made for any variances from the actual and budgetary figure.

Gross Lease.

With this method, there is one payment which includes the rent and outgoings. 

Direct Deduction Method.

Under this method, the tenant is charged as per the invoices paid by the landlord. This is usually done at the same time as a rent invoice.

What are recoverable outgoings in commercial leases?

Under section 70 of the Leases Act the landlord is only entitled to recover:

Reasonable expenses paid by the landlord in promoting a retail property in a shopping centre.

Statutory charges, taxes, rates and levies paid by the lessor.

Reasonable expenses in direct relation to the maintenance and repair of the property.

A commercial property lease that states a tenant to be liable for the outgoings must include provisions requiring the lessor to;

Account to the lessee at the end of the period for the actual expenditure compared with the estimate and make adjustments for any variances. 

They must also give budgetary figures for future outgoings at particular intervals I stated in the lease.

What should one do before entering into a lease?

That lessor or landlord must make sure that all outgoings to be charged to the tenant are disclosed in the lease the disclosure statement issued before the signing of the lease. 

On the other hand, the lessee/tenant should ensure that they entirely go through and understand all the items specified in the lease and disclosure statement. This will show what outgoings you are liable for with particular reference to the net lettable area you were leasing.

In conclusion, you should have a solicitor who specialises in commercial property entirely go through the lease and explain all the details to you before you sign a new lease.

Contact Con Tastzidis on 02 9882 2221 if you would like to discuss this further or have any questions regarding your existing or potential commercial real estate investment or lease. CST Properties – Sydney based Commercial Real Estate Agents & Business Brokers.