If you’re looking to purchase a commercial property, or already own one, it’s important to know how property rates increases affect both you and your tenants.
Increases in property rates aren’t new. In most cities, a rate increase is needed for inflation adjustments, council developments and transport improvements.
But in some cities around New Zealand, rates are increasing by a larger percentage. In Hamilton, the council has recently voted for a 9.7% rates increase to ratepayers. This affects not only residential homeowners, but commercial ones too. And this isn’t just happening in Hamilton. In Tauranga and Rotorua, ratepayers are also facing an increase in their rates.
If you’re a commercial property owner, it’s important to know how rates impact both you and your tenants. As experts in commercial property, the team at TelferYoung have put together some helpful tips to help commercial property owners be better informed about their rates.
The amount of rates payable to the council are linked to the rating valuation. Generally, the higher the rating value, the more rates you will pay.
Rating valuations are reviewed every three years, and each council review year differs. Here are some examples:
Since reviews are only conducted three-yearly, there can be disparity between the rating valuation and market value. Once the review has been conducted, they should be relatively consistent.
Did you know? If a building consent is lodged or subdivision occurs, rates are reviewed for the properties affected. In this case, the property owner has the right to object to the amended valuation within a set time period.
1. Look to the lease
There are two main types of leases: net and gross. A majority of leases for commercial properties are net, meaning the operating expenses (OPEX), including rates, are passed directly onto the tenants. In most of these net lease cases, the impact on the landlord is minimal (in the short term at least).
A gross lease means the landlord meets the OPEX. If the rates increase, then the landlord will see an immediate impact on the net cashflow to the property.
2. Be aware of the long-term impact
While rates increases don’t necessarily affect landlords with net leases in the short-term, when it comes time to review the lease agreement, the impact can be felt. In other words, tenants usually look at other rental options to avoid the higher OPEX.
Increases in rental prices will not necessarily increase at the same rate as the OPEX, in some cases they can actually decrease – like we saw during the GFC when there was excess supply and rental levels fell.
In short, a decreased rental revenue impacts the value of your commercial property.
3. How tenants consider the OPEX
Tenants tend to look to the total cost of occupying a property, which includes rental and OPEX.
Therefore, when costs such as council rates increase sharply (such as what is happening in Hamilton), tenants may be hesitant to pay increases in rent as they are also facing rising OPEX costs as well.
When this happens in the marketplace, a dampening in rental levels can occur – meaning landlords may have to compromise rental increases to keep their tenants.
Quick tip: The Total Occupancy Cost (TOC) is sometimes referred to as the Gross Occupancy Cost (GOC). This means the total cost of occupying a property, including rent and OPEX.
The best thing to do when rates increase is to check your lease to see which party is responsible for what.
If you’re entering into a new lease agreement, be aware of the factors discussed above and how this will affect the property value.
It’s important to talk to a qualified expert to know where you stand in the current market when negotiating a lease for your commercial property. This applies to both tenants and property owners alike.
By getting a qualified valuer involved before signing a tenancy agreement, you can ensure you’re getting a fair and current market rental value, and are aware of the impact the lease terms could have on the value of your property and cashflow.
If you are concerned about a review of the rating valuation of your property, the TelferYoung team are here to help. Get in touch today.
Posted 9 months ago