Property outgoings Outgoings are defined as those expenses, statutory charges, fixed and variable that are paid to keep the property in a good state of repair so as to maintain maximum market rental capacity. At the beginning of each calendar or financial year, building owners or managers prepare an Outgoings Budget and, depending on the tenant s lease terms, provide the tenants with a copy. Outgoings can be divided into two main categories: statutory charges operating expenses. Statutory charges Includes items such as: land tax municipal or shire council rates water rates for sewerage and drainage. Operating expenses Includes items such as: insurance which covers general insurance, public liability, machinery breakdown, workers compensation and industrial special risk where applicable air-conditioning and ventilation costs (excluding electricity) involved in providing sufficient air conditioning or ventilation to a property include maintenance contract fees, materials/parts, wages, service charges, water treatment testing, equipment lease fees and consultant fees common area cleaning the costs to provide cleaning to the common areas of the property only (not individual tenancies) such as cleaning contract fees, wages, window cleaning, grease trap cleaning and collection, rubbish removal, sanitary services, carpet cleaning, toilet supplies and cleaning and maintenance of cleaning equipment building supervision this covers all costs of the building staff who are located on-site at the property such as wages, mobile phone and pager costs, training, uniforms and travel allowances Property outgoings 1
car parking costs to manage any car park within the building including licence fees, signage fees, uniforms, wages, cleaning and contract fees electricity costs of providing common area light and power (not individual tenancies), as well as running air conditioning systems, lifts and escalators fire protection includes costs such as maintaining sprinkler systems, fire brigade monitoring fees, pump maintenance, contract fees to check equipment lifts and escalators costs associated with running these items (excluding electricity) include contract fees, wages, materials/parts, repairs, inspection and testing fees pest control cost associated with pest control repairs and maintenance covers costs in repair and maintenance of minor items that are not covered by other items and includes wages, materials, locks, painting and plumbing emergency generator costs associated with maintaining an emergency generator within a large property security/access control costs associated include security company fees, wages, equipment monitoring fees, phone line rentals (back to base alarms) security callout charges and lease charges salaries and wages for general staff, on site office and facilities management staff superannuation of onsite staff and payroll tax, but excludes building supervisors signs costs such as leases, maintenance charges, cleaning and repairs, electricity and licence fees gardening costs include wages, contractors charges, materials, water reticular repairs and maintenance, plant hire, equipment lease and landscaping costs administration/management fees includes agents management fees, printing, postage, office equipment and sundries miscellaneous includes costs not captured by categories above including audit fees, licence fees, strata levies, valuation fees, rent review fees, advertising and leasing fees. The majority of miscellaneous costs are termed non-recoverable expenses that is, they are met by the owner and cannot be included in calculations for billing the tenants. It is the role of the valuer to analyse the budgeted outgoings to ensure that they are in line with market levels and if not, make adjustments to the budgets to reflect market levels. The PCA conducts a survey each year of the operating costs of Sydney CBD and metropolitan buildings. The survey is a useful tool in comparing the Property outgoings
current outgoings of a subject property to a benchmark and can help identify items which are either being over budgeted or under budgeted in a property s outgoing budget. A typical outgoings schedule would look like the sample below: Outgoings Budget 001/0 Net lettable area 16 500 m Statutory expenses Per annum Council rates $57 118 $3.46/m Water tax $93 738 $5.68/m Land tax $4 454 $0.7/m Total statutory expenses $155 310 $9.41/m Operating expenses Insurance $10 177 $6.19/m Air conditioning $80 333 $4.87/m Common area cleaning $51 038 $15.1/m Toilet requisites $6 93 $1.63/m Rubbish removal $9 001 $1.76/m Equipment maintenance $5 087 $0.31/m Building supervision $11 130 $7.34/m Electricity $05 850 $1.48/m Security $5 000 $1.5/m Landscaping $1 590 $1.31/m Fire protection $ 143 $1.34/m Security $10 98 $1.79/m Gas & oil $3 75 $1.98/m Lift & escalators $110 103 $6.67/m Pest control $3 300 $0.0/m R&M electrical $47 868 $.90/m R&M general $165 86 $10.05/m R&M locks & keys $7 81 $0.47/m R&M plumbing $34 811 $.11/m R&M other $9 936 $0.60/m Sullage disposal $16 071 $0.97/m Telephone $18 817 $1.14/m Building automation $30 000 $1.8/m Property outgoings 3
Signage $314 $0.0/m Landscaping $7 640 $0.46/m Miscellaneous $5 909 $1.57/m Management $10 000 $7.7/m Total operating expenses $1 73 395 $104.99/m Total $1887 705 $114.41/m Outgoings recoveries Most leases provide for the lessor to recover outgoings from the tenants as a payment over and above the lease rental. The concept of net rent versus gross rent was discussed earlier in this section. Under a net rent lease, the tenant pays all the outgoings whereas under a gross rent lease the landlord is responsible for the outgoings. The net rent lease allows for the landlord to pay the outgoings directly (if not directly billed to the tenant) and recover them from the tenant. This is known as recovery of all outgoings. Where the rental is gross, most leases have a provision for the landlord to recover increases in outgoings above a base year. This allows the landlord to maintain the net return from the building during the lease term until the rental is next reviewed. For example: Rental (gross) payable under lease $100 000 p.a Tenant s responsibility for increases in outgoings $ 500 p.a Total payable for current year $10 500 p.a. The increases in outgoings would be calculated as follows: Lease commenced 1 Sept 1999 with base year for calculation of outgoings being 1 July 1999 Total outgoings for year ended 1/7/99 Total outgoings for year ended 1/7/00 Total outgoings for year ended 1/7/01 $0,000 p.a. $,500 p.a. $4,000 p.a. The tenant s responsibility for increases in outgoings in the second year of the lease is $,500 $0,000 = $,500. A cash flow over a three year lease term (from 1/9/99) would be as follows: 4 Property outgoings
Year 1 1/9/99-31/8/00 Rental $100 000 Year 1/9/00-31/8/01 Rental $100 000 Plus increases in outgoings $ 500 $10 500 Year 1/9/01-31/8/0 Rental $100 000 Plus increases in outgoings $4 000 $104 000 Note that in the above example, increases in outgoings are collected in arrears. However, in practice, most commercial office leases provide for budget estimates of the forthcoming year s outgoings to be made by the property manager, and the resultant increase over the base year to be calculated and paid monthly in advance. A reconciliation is then carried out at the end of the year when actual outgoings are known and a debit or credit adjustment to the tenant is made. For example: Base year for calculating increase in outgoings: 1/7/99 Base year amount = $0,000 Property manager s budget estimate of outgoings for the following year ended 30/6/00 = $3,000 The tenant would be billed the difference on a monthly basis that is: $ 3 000 $ 3 000 $ 0 000 = = 1 $ 50 per month. But, if at the end of the year actual outgoings were calculated as $,500, then the tenant would receive a credit of $500 the difference between the budgeted and the actual outgoings. Where there are a number of tenants in a building, the outgoings recoveries are usually worked out as a percentage of the area occupied: Tenant 1 1000 m 1000 4500 =.% Tenant 1500 m 1500 4500 = 33.33% Tenant 3 000 m 000 4500 = 44.44% Total 4500 m 100.00% If the increases in outgoings are calculated as above ($500) then Tenant 1 pays $555.50 (.%), Tenant pays $833.5 (33.33%) and Tenant 3 pays $1111.00 ($44.44%). Property outgoings 5
This method may not be consistent in all situations. For example, an office building containing mainly upmarket retail shops generates rental income well beyond its demised area when compared to the upper office levels. In this case, it might be fairer to calculate the liability for outgoings on the basis of actual rental paid by the lessee relative to the total rental value of the building. The table below gives an example of this. Tenant NLA (m ) % of total NLA Rental ($ p.a.) % of rental value Outgoing s $ psm Retail Tenant 1 550 1.9 330,000 600 Retail Tenant 00 4.7 10,000 8 600 Office Tenant 1 1,500 35.3 450,000 30 300 Office Tenant,000 47.1 600,000 40 300 Total 4,500 100 1,500,000 100 As you can see from this table, the percentage liabilities differ widely, depending on the basis adopted. For example, retail tenants may argue that they should not be liable for outgoings associated with lifts in the building when they do not get the benefit of them. The same could be argued for air conditioning, lighting, cleaning etc. In these cases, a separate figure could be negotiated for the outgoings of the office area and another for the retail area that is, two sets of outgoings budgets and recoveries. Some tenants (particularly the government) won t enter into a lease that provides for the recovery of increases in operating expenses but may meet increases in statutory charges such as council rates, water rates and land tax. The valuer has to be aware of the ways in which leases treat the recovery of outgoings and needs to ask the following questions: What is the total occupancy cost to each tenant? How much does the landlord receive in total income (rent plus outgoings recoveries)? What amount has to be paid in total outgoings in order to arrive at a true net income? Going back to the original example, the valuer would proceed as follows: Valuation date 1/10/00 Lease rental $100 000 Plus outgoings recovered $ 500 Therefore gross income $10 500 Less total outgoings $ 500 Net income $80 000 Note that if the valuation was undertaken a year earlier, the calculations would have produced the same result: 6 Property outgoings
Lease rental $100 000 Plus outgoings recovered $0 Therefore gross income $100 000 Less total outgoings $0 000 Net income $80 000 This shows that the owner has preserved the net income stream by collecting the increases in outgoing above the base year. Property outgoings 7