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Commercial Property Outgoings Explained

Outgoings is a general term used to describe the recovery of cost from the tenant for expenses associated with the running and maintainance of a commercial property during the term of a lease.

The scope and method of recovery of outgoings will be defined in the lease and may vary depending upon negotiations between the parties when the lease was established.

Typically outgoings includes expenses such as:

 

  • Rates (incl. Water & Sewerage charges)
  • Land Tax
  • Building Insurance
  • Body Corporate Fees
  • Property Management Fees
  • Repairs, cleaning, gardening, and maintenance but excluding capital items and development costs.

 


Retail leases although similar may be subject to alternative methods and conditions imposed by the Retail Leases Act and as such specialist advice should be sought.

For commercial and industrial properties, there are typically three basic methods of recovering outgoings:

1.       Direct Recovery

2.       Nett Lease recovery

3.       Gross Lease recovery

 

Each method of recovery has its advantages and disadvantages and situations when it would be most suitable.

 

Direct Recovery

As the phase suggests this entails directly recovering costs as and when they occur from the tenant.

Usually the owner or agent will receive the bills, pay them and the expense is subsequently added to the tenant’s next tax invoice in addition to the rental.

Pros

+             No annual budget or reconciliation required

 

Cons

-          Delay between owner settling the account and the tenant reimbursement

-          Major costs tend to occur either quarterly or annually and this can cause cash flow problems for owners and tenants.

-          Recovery of costs may incur an additional 10% GST in excess of the original amount.

-          Can be difficult to reconcile expenses against income for tax purposes around financial year end.

-          Individually presenting an expense to the tenant and can result in frequent and unnecessary disputes and delays

Suitability
Generally not a recommended method of recovery unless the scope of outgoings has been very limited under the lease and does not warrant another method.

 

Nett Lease

In this case the tenant will receive a rent and an outgoings charge item on their monthly tax invoice.

The outgoings expense is calculated by the preparation of a budget prior to the beginning of the financial year.

The budget considers all likely expenses that will be incurred in the coming financial year and is based on evidence from prior periods and quotes.

The total budgeted expense is equally divided over the coming 12-month period so that each month the tenant will receive a fixed outgoings charge plus their rental.

At the end of the financial year a reconciliation is undertaken that compares the actual expenses incurred against the budgeted amount and the account is adjusted if necessary.

 

Pros

+             Simple to invoice

+             Ability to recover any additional cost incurred

+             Provides certainty in relation to cash flow to tenant

+             Allows for unforseen expense to be recovered

+             Encourages desirable level of maintenance and repairs to be adopted

 

Cons
-              Annual budget or reconciliation required
-              Can from time to time impact the monthly rental return

 

Suitability
Generally recommended as the default method of recovery unless a regular and defined cash flow is a critical factor for the owner.

 

Gross Leases

In this case the outgoings expenses are included in the rental amountand accordingly the rental will typically be higher than that for leases where the rental and outgoings are stated separately.

For example, the market rental is $100/sqm p/a plus GST and outgoing expenses are estimated to be $15/sqm p/a.

The gross rental will be displayed as $115/sqm p/a plus GST and the tenants invoice will present only a single charge at the $115/sqm p/a plus GST.

 

Pros

+             Simple to invoice

+             No annual budget or reconciliation required

+             Potential to make additional income if outgoings reduce or savings can be made

+             Outgoings will increase in line with fixed or CPI annual reviews.

 

Cons

-          No opportunity to recover expenses over and above the estimated amount e.g. should outgoings end up as $25/sqm p/a as opposed to the estimated $15/sqm p/a, there is no opportunity to recover the additional expense from the tenant and the effective rental would be reduced from $100/sqm p/a to $90/sqm p/a.

-          No opportunity to adjust the level of outgoings during the term

-          A gross figure does not present as well when marketing the property

-          Can be a disincentive to owners to maintain and repair their property

 

Suitability
Generally recommended for small to medium size tenants that require certainty or for buildings that have a very stable expenses.

 

Prepared by:

Toby Sopp
Associate Director - Head of Asset Management

[email protected]
07 3216 6666
0402 891 145

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