Everything You Need to Know About Outgoings

If you own, buy or lease a commercial property it is important to understand what outgoings are, who is responsible for the payment of these costs, and how this can impact the value of the property.

Definition of Outgoings

At the time of writing the Real Estate Institute of Queensland’s Commercial Tenancy Agreement defines outgoings as:

“Outgoings” means the following charges levied or expenses payable in respect of the Premises, the Land or the Building (as the case requires):

• Rates and charges that a local government imposes and levies collected by a local government on behalf of the State of Queensland;
• Insurance premiums (including building, fire, loss of rent, plate glass and public liability) payable by the Lessor;
• Land tax;
• Body Corporate fees and levies (including but not limited to Administrative Fund levies and Sinking Fund levies); and
• The additional outgoings referred to in Item 10(b) of the Reference Schedule”

Additional costs could include:

• Managing and operating the building;
• Repair and maintenance of the building;
• Gardening and landscaping;
• Provision and servicing of air-conditioning to the building;
• Cleaning the building;
• Pest control;
• Security services;
• Provision and servicing of fire detection and extinguishing equipment
• Provision and servicing of lifts and escalators
• Common area electricity;
• Trade waste; and
• Other.

What Is The Difference Between Nett/Net and Gross Rentals?

If a tenant is responsible for paying the outgoings then the rental is referred to as a “net rental” or “nett rental”. On the other hand, if the rental is inclusive of outgoings then it is called a “gross rental”. When assessing the potential purchase of a property it is important to assess exactly who pays what regardless of whether the rental is marketed as net or gross as some items may be included/excluded.

Are Utilities Outgoings?

As agents we normally do not refer to utilities as outgoings. Costs such as electricity and telecommunications are tenant’s operating costs that they are responsible for arranging and paying. A potential exception to this is water – whether an agent refers to this as an outgoing or a utility during the marketing of a property can vary depending on whether the property is separately metered and who is responsible for the payment of this item. We note that water is usually paid by the tenant as it is the occupier who controls how much is used.

Who Pays Outgoings for Commercial Property?

The most common set up for a commercial or industrial property in Brisbane and the Gold Coast is a net rental, meaning the tenant is responsible for paying the costs and levies for the property. This means if the holding costs fluctuate then the tenant’s payments change as opposed to the landlord’s returns. Alternatively the lease may be a gross rental, which could be the case for smaller tenancies or short term leases, which means if outgoings increase or decrease then the landlord’s profit margins change as opposed to the tenant’s rental payment.

How Are Outgoings Paid for Commercial Property

There are two main ways that outgoings are charged to tenants. An estimate of the annual outgoings should be determined by the owner or property manager and provided to the tenant so they know what these costs may be. The landlord or property manager may elect to have the tenant make monthly contributions to the outgoings, then at the end of the accounting period make an adjustment based on actuals. Alternatively the landlord could provide a copy of the outgoings as they are billed to them with the tenant to make payment by the due date. If the latter method is used we recommend landlords pay the expense themselves then invoice the client for the same amount – this limits the potential of late fees or negative credit ratings for the landlord if the tenant does not pay by the due date.

The method in which outgoings are paid could have an adverse effect on the value of the property or the financial return on the landlord’s asset. For example, if a tenant is meant to pay a levy when the bill is issued and they fail to do so,  the landlord would need to take further action unto the tenant in order to recover the monies (this would obviously be difficult if a tenant has become insolvent). Having the tenant make monthly contributions prior to the bill being issued can reduce this risk.

Estimating the annual outgoings can be difficult if the property is a newly built property (such as a new strata titled industrial unit development) as Council rates would not have been issued yet. In this case the estimated outgoings may not be exact. The property owner, commercial property agent, or property manager may be able to provide a reasonable estimate of what the annual costs may be based on previous experience of similar properties.

Is Land Tax a Recoverable Outgoing for a Commercial Property?

In the State of Queensland, land tax can be charged to a tenant if the lease allows it. An exception to this is if the tenant’s use is governed by the Retail Shop Leases Act 1994. This Act provides greater restrictions on landlords and tenants and specifically prohibits land tax and solicitor fees for drafting leases to be passed onto a retail tenant.

An additional point to keep in mind is that many leases will restrict how land tax can be calculated for the purposes of charging to a tenant. For example, the lease may dictate that the amount charged to the tenant can only be calculated based on a single land holding basis, as opposed to a higher amount if the landlord owns multiple properties under the same entity (as this would usually result in a higher land tax bill from the State Government).

Do I Have to Pay Outgoings for a Commercial Property?

While almost anything in a lease agreement is negotiable, ultimately it comes down to whether a landlord is willing to accept a net or gross rental. We usually recommend commercial property landlords to keep outgoings as a separate item to which tenants make contributions. Other landlords may prefer a higher all-inclusive rental so they don’t have to worry about estimating how much outgoings may be due, or perhaps they see it as a hassle to have to collect the outgoings monies from a tenant. The size of the property, landlords experience, amount of supply vs demand in the market, whether they have a property manager in place, and the wider macroeconomic environment can also influence the decision. Either way, what is agreed in the lease is what remains for the initial and subsequent option periods.

How Do Outgoings Impact on the Value of Commercial Property?

There are multiple ways of appraising a commercial or industrial property. Typically it is best practice to conduct multiple alternative methods of appraisal in order to accurately assess what a property may be worth. One of those is a Rental Capitalisation method of appraisal – this is when the true net rental is calculated and then a market/desired yield is applied. Basically a purchaser would calculate what the income of the property is less outgoings that the tenant is not paying. For example, if a tenant is not contributing to land tax or Council rates then an investor would deduct those costs from the income, then divide that amount by the yield to determine the potential value of the asset. Therefore most commercial property owners want their tenants to pay all of the outgoings, or the owner will seek a higher base rental to offset the difference, otherwise the value of their commercial property might be diminished.

Do you have a question about outgoings for commercial or industrial property? Crew Commercial’s real estate agents and property managers are experts in their local markets and would be happy to assist. 

The information in this article is a guide for those interested in commercial property. We encourage parties to read the wording of their lease, conduct their own research, and seek independent legal advice should you need to make decisions relating to items discussed.

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