Variable outgoings can seem like a confusing concept, watch as Anna clarifies how commercial property outgoings are charged.Invalid LeadPlayer video - ID not found!
00:22 What are variable outgoings?
00:30 Some common variable outgoings
01:00 Who pays?
01:40 How are they charged?
03:30 Land tax can be tricky
04:50 Graffiti & plate glass insurance
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Hi, Anna Lynch here from Perth Commercial Property. Today I’m going to have a brief chat with you about what are variable outgoings and how they impact on a lease on a commercial property.
Variable outgoings are outgoings (variable) that are associated with the operating of a commercial property. Some of the more common types of variable outgoings include strata rates, shire rates, water rates, land tax, building insurance and property management fees. Other less common but very legitimate outgoings include common area cleaning, common area garden maintenance, security and the like.
Now who pays for variable outgoings?
That’s a big question. Essentially variable outgoings are nearly always paid by the tenant. It will, of course, come back to what has been negotiated between the landlord and the tenant, and therefore what is documented in the lease. Under a regular commercial and industrial lease, the landlord has the ability to pretty much negotiate the inclusion of most, if not all variable outgoings. However, under a retail lease, the Retail Shops Act specifically prohibits the ability of the landlord to include the outgoings associated with property management fees.
Now how are outgoings charged?
There are three main ways, really two main ways, and then a third way, which is a combination of the main two ways in which we can charge variable outgoings.
The first is on demand.
Now this means that the landlord or a property manager will receive a bill for a variable outgoing, so for example the shire rates will come in, they will then on-charge this bill directly to the tenant. And whether the tenant has a week, a fortnight, a month to pay this bill will all depend on what’s been negotiated in the lease.
The second way of charging variable outgoings is on a monthly basis.
Now this means that prior to the commencement of the financial year, a variable outgoings budget is prepared based – normally based on the charges that we received from the prior year, and then maybe increased by inflation or a predetermined fixed percentage. Once its final total amount is known, it’s divided by 12 and then 1/12th of this total variable outgoings estimate is charged to the tenant each month.
At the end of the financial year, the actual invoices are compared to what was budgeted and a reconciliation is performed. Where the tenant has not paid enough in variable outgoings, so the budget was lower than it should have been, the tenant will be invoiced for the difference. However, in the instance where the tenant may have paid too much in outgoing they will need to be refunded.
Now just to finish off, I just wanted to run through a couple of the more trickier types of outgoings that may pop-up, or little areas to be aware of. The main area that really springs to mind is land tax. Now what you need to be aware is that land tax can only be charged if you like on a single ownership basis. This means that if a landlord, property owner owns more than one property, then you must be able to determine the assessable value on the particular property of which the tenancy is in place.
So based on this tenancy, based on this assessment of land tax for this one property, you can then apply and find the exact percentage of land tax that would apply, was just this one property, not if they own two or three. It’s simply not a case of getting the total value and dividing it by the number of properties that a landlord has. This will in nearly all instances make for a larger allocation of outgoings.
Another example to just to be aware of is maybe air-conditioning maintenance. Now in some instances, air-conditioning maintenance maybe included in outgoings, if on-demand or monthly, in which case the tenant doesn’t need to assume responsibility personally for maintaining the air-conditioners. However, if this is not the case, the maintenance of an air-conditioner is in fact a tenant’s responsibility and therefore you must ensure that this is done separately.
Graffiti is another and plate glass insurance are two other areas, which can often be and often are covered by strata levy. So a strata company would take care of this and then on-charge the cost via strata levies. So it’s worth understanding what is included within your strata levies that are paid, so that you know whether or not these need to be taken care of Separately.
Well, that wraps up how, a quick chat today on outgoings, be sure to give me a call should you have any questions.
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