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What Outgoing Costs Are Involved In A Commercial Lease?

When taking out an office lease there are a variety of outgoings and costs in addition to rent for prospective commercial tenants to be aware of. This article outlines the extra costs you may incur.
David Prosser
Office Leasing Outgoings

In Addition to the Rent What Other Costs are Incurred When Leasing Office Space?

When taking out an office lease there are a variety of costs in addition to the rent for prospective tenants to be aware of. Information around these extra costs or outgoings are not always forthcoming yet could have a significant bearing on your decision making.

This article outlines the commercial lease outgoings you may incur. There could be other costs depending upon how the Landlord wishes to structure their leases, but the ones outlined below are the most common.

Increases In Outgoings

 Your rental rate will usually be presented as ‘gross’ (inclusive of building outgoings) or net (exclusive of building outgoings).

Gross:

Under a gross lease the Tenant pays a fixed rent. Often though, Landlords have the ability to recover any increase in outgoings at the end of each financial year, a clause that you may notice in your Offer To Lease. The rent in its true form is therefore ‘semi-gross’ and often mis-represented.

The agent (via the property manager) will often be able to provide some visibility on these future costs as a guide. The calculation is quite simple. The total commercial outgoings from the last full financial year prior to the commencement date of the lease is used as the ‘base year’ and all future outgoings increases are calculated from this figure. Each tenant pays a proportionate increase (%) based on the total NLA that they occupy within the building.

If, when you negotiate your commercial lease, the Landlord has a forecasted budget for the following year’s outgoings they will be able to get you an indication of these costs. Alternately, they will be able to look back retrospectively over the last few years and let you know what these costs would have been if you had been a tenant within the building during that time. Although past years’ figures cannot be relied upon as an accurate indication of future costs, these figures are generally enough to satisfy tenants as they provide a guide.

Net:

If your rental rate is presented as being net (of outgoings) you will generally pay outgoings each month based on a full year’s forward estimate. A reconciliation will take place at the end of the financial year and the tenant will be required to make a top up payment towards the outgoings if the estimate was too low. Alternately, you should receive a refund if the estimate was too high.

Cleaning Costs

Tenants typically pay for both tenancy cleaning and common area cleaning.

For established office towers the cleaning will generally be undertaken by a single designated cleaning company that has an ongoing contract in place with the building owners. Tenants are required to have their tenancies cleaned regularly to comply with building rules.

The cleaning contract is tendered as and when required to ensure tenants are receiving value for money and a high standard of service.

The property manager can provide an estimate of these outgoing costs on a $/sqm basis. As a guide you may find that cleaning costs vary from approximately $13m2 – $18m2 exc GST.

From time to time common area cleaning may already be factored into the quoted rental rate.

Tenants occupying smaller low-rise office buildings often have the opportunity to clean their own tenancies, particularly if there are only a small number of tenants within the complex.

Electricity Usage

Each individual tenancy within an established commercial office building will typically be separately metered. Tenants are generally charged on a monthly basis.

Electricity costs will vary depending upon each tenant’s respective requirements.

After-hours Air Conditioning

As a general rule, landlords will provide air-conditioning to all internal tenancies and common areas during designated building hours (check these hours with your property manager).

Outside of building hours tenants may choose to pay for after-hours air-conditioning. This is often charged in two (2) hours blocks. These outgoing costs can vary quite significantly from building to building.

Tenant Directory Signage

Tenants are generally required to pay a fee if they wish to have their company name stated on the tenant directory boards both on-floor and within the ground floor lobby. Indicative costs for this could be as low as $100 – $150 exc GST.

Tenant Car Parking Signage

Should you lease a permanent onsite car bay (or car bays) within the building it may be a requirement that you pay a nominal fee for a small sign to be erected so it is clear which bays belong to your business exclusively.

Access Cards

At the commencement of a commercial lease, most landlords will provide a set amount of access cards to an incoming tenant at no cost. This is often at a ratio of 1:10sqm. Any additional cards required will come at a cost which may vary from building to building.

Condition Report

If your business is leasing a fitted out tenancy or having the landlord deliver a fit out for your use, then typically a Condition Report is required. This report outlines the condition of the tenancy upon handover from the Landlord to the Tenant. Subject to fair wear and tear the tenant must be returned (unless otherwise agreed) in this condition at the expiry of the lease.

In some instances, the property managers will be able to complete this report, but more of than not an independent third party is engaged with the costs being shared between the Landlord and the Tenant.

 

Note* these costs generally apply to larger commercial office towers in Brisbane’s CBD. There may be further costs that have not been outlined in this article and therefore it is important to check with the property manager before entering into a lease commitment.

Image sourced from 100 Edward Street.