WTP is involved with many of the commercial office fitouts undertaken across Australia. Through that extensive experience we have been asked many times to carry out due diligence studies on the options of relocating tenancies to new premises. One of the big factors in that decision process is the offer of landlord incentives. These landlord incentives can represent part, all or more than the capital cost of the fitout project.
The landlord incentives will vary in line with:
- Supply and demand of commercial office space
- The availability of quality commercial office space
- The state of the economy at the time.
Landlords use incentives to maintain ‘face’ rental levels. Face rentals are the declared rental values for the property. However the true rental values are affected by the landlord incentives offered at the time of taking up the agreement for lease. Tenants look at landlord incentives as a way of spreading capital costs over the period of the lease. Depending on the level of incentive this will either represent part, all or more than the capital cost of the fitout. With any additional incentive being set against a rent free period or rent abatement. In the Sydney market we are generally experiencing incentives of approximately 30%, while Melbourne is approximately 25% to 30%. Brisbane incentives can vary greatly but we have seen 45%, Perth is approximately 45 – 40% and Adelaide 20 – 25%. It should be noted though, that Sydney and Brisbane tend to apply incentive to rent value whilst other cities tend to be face to face rental valuation. This percentage is calculated using the rent x the NLA x the incentive percentage.
The total cost of occupancy is made up of fitout costs (including professional fees, authority fees, agents fees, legal fees etc.) relocation costs, make good costs of existing premises, rent, outgoings, incentives, tax depreciation and future make good requirements.
From a tenant’s point of view the influence of the level of incentive amount depends on:
- The amount of incentive
- The rental value
- The quality of the building being offered
- The location of the building being offered.
Landlords will only offer incentives to a value that will attract a tenant. Rents are adjusted to take into consideration the level of incentives. There is no free lunch.
It is important to note that the capital cost items set against the incentive are generally, under the terms of the agreement for lease, considered to be the property of the landlord. The landlord is able to offset those items attributed to the incentive against tax and it is normal for the tenant to arrange the provision of a tax depreciation schedule to be provided to the landlord at the tenant’s cost. It is also important to note that although the items offset against the incentive belong to the landlord, depending on the lease agreement, the tenant may still have to incur the make good costs associated with their removal at lease end.
WTP are available nationally and internationally to assist clients in assessing the true cost benefits of new tenancy relocations as well as preparing the tax depreciation schedules.
Gerry Heaton, Associate
T: +61 2 9929 7422