Commercial Property Operating Costs

Commercial Property Operating Costs

Property Insights

2014-03-31

Most office tenants recognise the concept of landlords charging a base rental, parking charges and then an extra variable amount for the building's operating expenses. Separate utility metering for calculating these operating expenses is commonplace in most commercial leases. However, the language contained within the lease agreements about these charges can sometimes be confusing, subject to interpretation and contain substantial financial risk. Here's what you need to know. Usually, a ‘rate per square metre’ amount in a commercial lease is applied as an operating expense component built into the rental numbers. A tenant is then required to pay their pro-rata share of the operating expenses. Typically, the landlord estimates these operating expenses in advance. In South Africa, electricity costs are the single biggest contributor to operating costs. These costs are also growing rapidly, oustripping any other operating costs. The office sector bears the heaviest increase and so we always advise our clients to be weary of committing to inefficient B-Grade spaces that appear to offer rental savings. While you may be saving on rental costs, over a five year period an electrically inefficient building will prove far more costly than its efficient, A-Grade counterparts.  As the tenant, you can control costs during lease negotiations by requesting a ceiling on certain operating costs. Your commercial landlord may also allow you to audit certain expense calculations so that it's clear they're fair and accurate. A poorly negotiated lease agreement can cost you as the tenant a significant amount of money over the term of an office lease. We recommend using the services a competent a property practitioner when formalising your leasing arrangement. Using a competent professional can go a long way in insuring that you mitigate any material risk.

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