Commercial property lease costs & the iceberg effect

It is extremely easy for most of us to be lulled into thinking a quoted rental price is the main cost when entering into a commercial property lease. But lurking beneath that highly visible tip of the iceberg are some nasty extras.

I frequently experience people who enter into long term commercial property leases focussed on the rental cost per square metre. They see that as their main cost and don’t consider all the other costs that will come up during the course of the lease.

I consider it is critical to do the counter-intuitive thing and focus on these other costs before signing a lease. If you don’t, they WILL take you unawares.

The extra costs incurred during the life of a lease vary considerably, so I can’t give you a percentage figure to add to the rental cost that covers them. But I’ll run through some of the costs to give you a general idea…

First there are the legal and consultancy services required when drawing up the lease.

Next are the operating costs, or OPEX. These can take many forms, and charges can be apportioned to tenants for a wide range of expenses.

Take the example of a CBD multilevel building that has entrances on several streets, escalators and lifts. A tenant is going to be liable for costs for common areas in the building’s entrance ways, toilets, and the maintenance of equipment.

You can take it as a rule of thumb that if you occupy 10 percent of a building, you will be liable for 10 percent of all the building’s operating costs.

The next thing to consider is the standard requirement in leases for tenants to redecorate during the term of the lease. This doesn’t come up much in a short term lease over say 3 years, but over a longer term lease, the tenant will be liable for such costs as repainting, cleaning and replacing floor coverings. It becomes a matter of what is considered fair wear and tear.

Another cost that is often overlooked is the “make good” requirement. At the end of the lease the property must be returned to the same condition it was in when it was first leased. This can incur all sorts of costs, particularly if partitioning and fit-outs leave a mess when they are taken out.

Then there are repairs and maintenance throughout the term of the lease. It is the tenant’s job to maintain the premises to a certain level, as agreed with the landlord. And depending on the nature of your business, wear and tear can have an impact that will seriously show up after a few years.

The important thing is to recognise, be prepared, and budget for these costs. They are additional to the quoted rental per square metre and certainly add up over time.

It is equally important to make sure you are crystal clear how all these costs are specified in your lease.