How to appraise an office from a financial perspective

A TENANT’S GUIDE COVERING TRADITIONAL AND FLEX SPACES

BEFORE MOVING INTO NEW PREMISES, YOU NEED TO KNOW WHAT YOUR FINANCIAL LIABILITY IS FOR THE DURATION OF THE TENANCY.

HOW MUCH IS THE RENT

Rent is usually calculated on a per square foot per annum basis. For example, the annual rent for a 2000 sq ft office at £70 per square foot would be calculated as follows:

Rent: £70 psf x 2000 sqft Area = £140,000 per annum

WHEN IS THE RENT PAID (WEEKLY, MONTHLY,

QUARTERLY)? IS IT IN ARREARS OR IN ADVANCE?

Rent on traditional or leasehold offices is usually paid quarterly in advance whereas serviced, managed or flex space is usually paid monthly.

BY WHAT METHODS CAN THE RENT BE PAID?

CASH, CHEQUE, PAYPAL, BACS?

Again, differences occur with the two distinct commercial property routes. Traditional office space rental would usually be paid by BACS or CHAPS upon settlement of an invoice from the landlord whereas for flex/serviced space it is normal for a monthly direct debit to be set up on signing of the licence agreement.

DO YOU NEED TO PAY A DEPOSIT? IF SO, HOW MUCH IS IT AND WILL IT GET REFUNDED AT THE END OF THE LEASE TERM?

Leasehold property rent deposits are framed by a legal deed and the amount is agreed at Heads of Terms stage. The actual amount held is negotiable but can be from 3 months – 12 months rent. Tenants must allow for VAT on top of the rental figure.

Flex/Serviced tenants are expected to provide a rental deposit of 2 months licence fee dependent on the operator.

HOW MUCH ARE THE BUSINESS RATES?

This is effectively a council tax for businesses. Business Rates are paid directly to the local authority and are calculated on a per square foot basis as you would an annual rent.

Tenants are advised to make enquiries to the local authority in which the office is
situated however a good commercial agent will be able to help navigate this.

Serviced office tenants will have their business rates ‘packaged up’ within their all-inclusive licence fee and so is not a consideration.

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ARE THE SERVICE AND MAINTENANCE CHARGES INCLUDED IN THE RENT? WHAT DO SERVICE AND MAINTENANCE CHARGES INCLUDE?

In flex/serviced spaces, any service or maintenance charges are included in the monthly rental making things easy and straightforward for the tenant.

In leasehold property, things are much more complicated and tenants are advised to tread with caution and take advice.

Generally a service charge will be administered by the landlord and recouped on a pro-rata basis to each individual tenant by way of a quarterly bill. This will usually include items like common part cleaning, lift maintenance, receptionist cost, security and any bike racks and showers.

ARE SERVICE CHARGES CAPPED OR OPEN-ENDED?

A cap (a limit on the amount of service charge) is not common and needs to be carefully negotiated by an experienced advisor. This can significantly mitigate any liability for a tenant.

Open ended service charges can expose tenants to exceptional costs throughout the course of the lease.

WILL THERE BE ANY ADDITIONAL CHARGES FOR SHARED SERVICES SUCH AS SECURITY/RECEPTION STAFF, CAR PARK OR GARDENS?

In some cases there is a further ‘estate charge’ where common grounds are maintained by the landlord and recharged to tenant.

AT WHICH POINTS DURING THE TENANCY WILL THE RENT BE REVIEWED? HOW WILL THE RENT BE REVIEWED?

In leasehold property, rents are usually reviewed every 5 years.

The focus of the review is to assess the current value of the property. Then, the rental rates are adjusted, based on the condition of the premises and the current market. For example, if average local rental prices have risen steeply in the last couple of years, most landlords will want to increase their rent to reflect this.

Tenants should note that most commercial property contracts state that rent can only be adjusted upwards. This means that the rates can only rise or stay the same; they’ll
never be lowered.

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WILL THERE BE ANY DILAPIDATION COSTS (THE COSTS OF REINSTATING THE PREMISES TO THE CONDITION YOU FOUND THEM IN AT THE BEGINNING OF THE LEASE TERM).

One way to view dilapidations is the ‘exit costs’ for any leased building. It costs to restore the property to its original state for the next tenant. The dilapidation process allows landlords to be fairly compensated.

Dilapidations typically include repairs and redecoration. They are also likely to include tenant signage, partitioning, cabling, carpeting and fitted furniture. Dilapidations costs cover all that is required for a commercial landlord to return the property to a lettable state.

IS VAT APPLICABLE?

In most cases yes. In leasehold spaces VAT applies to rent and service charge- your costs will be ‘grossed up’ by 20%. VAT does not apply to business rates.

In flex space, your monthly bill will usually include a 20% VAT element