What hidden costs are there in a lease?

Do you know what costs are entailed when you sign up to a lease?

The lease has one headline number, the rent.

It is very important to realise that there are several recurring costs, some monthly, some annually and some at start-up of any lease that can make or break any business.

The disclosure statement, which is provided before a lease can be finalised is the best place to summaries and find all of the hidden costs.

Shopping centre rents

For the purposes of simplifying the exercise, I will use a starting rent of $100,000 per annum in a shopping centre scenario. Let’s assume the site is in a large shopping centre.

The actual yearly gross rent will look as follows as the further inputs will be hidden within the documents.

Rent:                  $100,000.00 plus GST

Outgoings:          $23,000 plus GST

Marketing:          $6,800

Storage:               $4,500 (you decided you need storage separate so this is tacked on)

Rates:                  $10,500

Total gross rent: $144,800 per annum, $44,800 or 50 per cent more of add on costs that can quickly creep up on a business if not accounted for.

Hidden extras

The further hidden costs in a shopping centre new store agreement that pop up as a once off when starting are:

Design review fees:         $3,500

Consultancy review:       $3,500

Category 1 costs:             $80,000 (average across food and general use for 100 sqm. These costs are for work such as modifying airconditioning ducts, fires systems modifications, under floor plumbing modifications)

These further costs above are rubbery and usually well hidden in documents referred to as fitout guidelines manual.

By referring to ‘the manual’ in the disclosure statement and lease, centre owners don’t actually disclose these costs, and this has the potential to ambush the un-initiated retailer. Often, the prospective tenant is so deeply committed to the store by this stage, they have little bargaining power.

In summary in the first year we have a rent of $100,000 which has quickly become a cost of $231,800, all prior to fitout and equipment.

Strip shopping rents

Strip site locations are far simpler, however, this does not mean hidden costs do not exist. The hidden costs encountered in strip shop (independent owner) locations generally arise because the owner or agent are not across the details and obligations. In this scenario a summary might look like this:

Rent:                    $80,000

Outgoings:          $3,500 (usually rates and building insurance)

The difference with such properties is that if you modify building services (fire services, drainage and the like), you will pay real world contractors for such costs, perhaps $20,000 in total on a like for like comparison to the example above.

The problem with strip sites is that when they are not configured to accommodate particular services, the landlord will wipe their hands, as it becomes a case of buyer beware.

It is not unusual for costs like installing a grease trap, upgrading power and bringing gas to a site to quickly total $20-30,000. The other problem with these sites that adds to costs is councils are cumbersome and slow and can cause massive delays, which ultimately is a hidden cost to the retail business.

In summary, getting specific expert advice and representation from industry experts is the key to minimising these costs and ensuring a retail business does not become burdened by any hidden costs.

Published By Ange Kondos | 24 July 2018 |
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