Whether you’re considering purchasing a commercial property or already own one, understanding your financial obligations is crucial to maintaining a successful and profitable investment.
If you’re looking to understand what your liabilities are as commercial landlord, or for information about what you and your tenant(s) are liable for, then you’ve come to the right place.
In this beginner’s guide, Head of Property Asset Management, Carl Grint, explores the various financial responsibilities and liabilities that landlords of commercial property may encounter – from maintenance / repair and tax, insurance and legal costs, to preparing for the unexpected.
It is important to state that your obligations will vary depending on your location and the type of commercial property you own, but some of the primary financial obligations you take on when becoming a landlord of commercial property, include:
This is about ensuring the property is well-maintained and addressing any necessary repairs to keep it safe and attractive to tenants.
Maintaining your commercial property is not just a responsibility; it’s essential for attracting and retaining tenants.
Regular maintenance and prompt repairs will prevent costly issues in the long run. Maintenance costs can include landscaping, HVAC (heating, ventilation and air condition) system servicing, plumbing repairs, and structural maintenance.
Paying property taxes such as business rates, is vital and can be a substantial expense, particularly for industrial premises in prime commercial areas, for example.
Property taxes vary depending on location and property value. It’s crucial to budget for these taxes, as they can represent a significant annual expense. Consult with a Rating Surveyor to understand what you are liable for, as well as potential incentives or reliefs that you may be eligible for.
Protecting against unforeseen events like fire, natural disasters, or liability claims through insurance policies is a non-negotiable expense.
It provides protection against various risks, including property damage, liability claims, and loss of rental income. The specific coverage you need may vary, so consult an insurance broker to determine the right policy for your property.
This is about charging tenants for common area maintenance expenses and recovering these costs.
Service charges are typically passed on to tenants. These charges cover expenses related to maintaining common areas of the property, such as parking areas, lifts, heath and safety equipment, and shared utilities. To ensure transparency, it’s important to document and justify these charges.
As noted in the ‘Service charges in commercial property 1st edition’ by RICS, clear communication with tenants regarding service charges is essential to avoid disputes and build trust, fostering a positive landlord-tenant relationship.
This is about covering or passing on the cost of utilities such as water, electricity, and gas.
Depending on your lease agreements, you may either include utilities in the rent or charge tenants separately. Monitoring utility costs and ensuring efficient usage can help control expenses. Again, transparency is best practice here, to ensure you retain tenants.
If you financed the purchase of your commercial property through a mortgage, you’ll be responsible for making regular mortgage payments. It’s essential to budget for this expense and have a contingency plan in case of financial setbacks.
If you hire a property management company to handle day-to-day operations, you’ll incur fees for their services.
These fees typically cover services such as rent collection, maintenance coordination, health and safety management and financial reporting.
Asset management is a critical component of effective commercial property ownership and management.
It involves the oversight of the property’s financial performance and strategies to maximise its value. Asset managers are responsible for controlling the running costs of the investment, optimising revenue streams, and seeking ways to add value through proactive measures such as rent reviews and lease renewals.
These services often come with fees charged to the property owner but can significantly enhance the property’s long-term profitability. While an additional expense, it often pays for itself through increased rental income, cost savings, and enhanced property value.
Property owners should carefully evaluate the qualifications and track record of asset managers to ensure they can effectively maximise the potential of their commercial property investment.
Expenses related to legal matters, contracts, and administrative tasks.
Landlords may encounter legal and administrative costs related to lease agreements, eviction proceedings, or other legal matters. Consult with legal professionals to navigate these complexities and ensure you’re in compliance with laws.
If you rely on a letting agency to find and place tenants, you’ll need to budget for their fees. These fees are typically calculated as a percentage of the rent.
Capital expenditures involve significant investments in the property, such as renovating common areas or upgrading infrastructure. While these expenses can enhance the property’s value and attractiveness to tenants, they require careful budgeting and planning.
Vacant commercial units are subject to nondomestic rates, which can be a financial burden. It’s essential to understand your local tax laws and budget for these holding costs if you anticipate vacancies.
Tenant defaults can be a challenging situation for both landlords and property managers.
When a tenant fails to meet their lease obligations, including paying their share of service charges, it can have significant implications for the property’s financial stability and the ability to cover common area maintenance costs.
In such cases, you have to be prepared to step in and take appropriate action to ensure the continuity of service charge contributions.
Preparing for unexpected costs, such as emergency repairs or legal disputes.
No matter how well you plan, unexpected expenses can arise. Building a financial reserve for emergencies is a prudent strategy to ensure you can address unforeseen issues without compromising your financial stability.
Being a landlord of commercial property comes with a range of financial responsibilities and liabilities. It’s essential to thoroughly understand and budget for these obligations to ensure the success and profitability of your investment.
Proper planning, transparency with tenants regarding service charges and seeking professional advice, when necessary, can all help you navigate the complexities of commercial property ownership and minimise financial risk.
As you embark on your journey as a commercial property landlord, remember that knowledge and preparation are your most valuable assets. If in doubt, seek the advice of professional property asset management experts, who can support you throughout the lifecycle of your building / portfolio needs.
For help and support with your property asset management requirements, get in touch.
