26 July 2019/ sale_commercial_property

A guide to understanding operational expenditure

Capex vs Opex – here’s what you need to know when you’re about to lease an industrial space...

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Capital expenditure (Capex) and operational expenditure (Opex) both refer to money being paid out of your company. However, this happens in completely different ways. Capex relates to expenses your business incurs now in order to generate profit in the future – for example, investing in a new building, computers or vehicles to transport goods. Opex refers to the cost of the day-to-day running of your business – wages, utilities, rent, along with general and administrative expenses.

From a landlord’s perspective, Opex is their way of recouping the costs to own and maintain their building. Depending on the conditions of your lease, you’ll either pay operating expenses as a component of gross rent or in addition to base rent. However, before you sign on the dotted line, to lease the future home for your business, it’s essential to understand exactly what it is you’re agreeing to. Lease conditions vary greatly and you need to know what Opex you’ll have to fork out for – and what your landlord has agreed to be responsible for. Not doing so could result in some rather unwelcome surprises.

Typically, tenants pay their pro-rata share of the building's total operating expenses based on the size of their space relative to the building. In a multi-tenant property, each tenant will pay a portion of the building's total Opex proportionate to their size in the building. In a single-tenant building, the tenant is typically responsible for 100% of total operational expenses. However, leases can be lengthy legal documents and legal fees can rack up if you’re not prepared. Read all the small print and always get expert advice.

What to look out for before signing a lease

 

  • What repairs and maintenance will you be responsible for?
  • Is there a service or maintenance charge and what does it include?
  • What utility supplies does the building have (gas, electricity, broadband, water) and is this included in the lease or will you have to pay these direct?
  • What’s the total monthly cost and what does it include – rent, rates, service/maintenance charge, insurance?
  • Have you factored in everything before making a decision?

Important considerations to make sure everything adds up

 

Common areas

Where properties have common areas – such as service yards, landscaping or security – which benefit all tenants, it’s usual for landlords to charge a service or maintenance charge as a contribution towards their upkeep and maintenance. The structure of the charges can vary – either fixed or variable and may differ from year to year.

Repairs

Depending upon what your lease says, you may be liable for internal and external repairs of your building during the term of your lease. In the worst-case scenario this may include repairs for damage or deterioration which occurred before you moved in. Make sure you understand what you will be liable for to avoid unexpected bills.

Utilities

Unless your landlord lets you know otherwise, it’s likely you’ll need to source your own gas, electricity, broadband, water and waste supplies. This works much like it does at home, so it’s worth getting quotes in advance.

Insurance

The landlord will almost always insure the building on your behalf and recharge the cost of this to you. However, you’ll also need to take out your own insurance policies to cover contents and public liability.

Business rates

The Government charges all commercial tenants business rates on properties they rent – rather like Council Tax for commercial property. They are typically around 50% of the rent charged. However, if your rateable value is less than £15,000 per year, you may be eligible for small business rates relief or may not be liable for paying rates at all.

End of lease

At the end of your lease you’re usually required to return the unit ‘in good and substantial repair and condition’. This generally means no worse that when you moved in but, depending upon the condition when you took the premises on, could mean putting it into a better condition than when you took the lease. The Royal Institution of Chartered Surveyors found that the average dilapidations settlement on industrial property is £7.27/sq ft, which is likely to be more than a year of rent for most occupiers. Some landlords offer a Schedule of Condition to help reduce this liability, while others (like Industrials) offer leases which exclude dilapidations at the end of the lease, so you can simply walk away.

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