All Topics / Commercial Property / Insulation in commercial property – who pays..?

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  • Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    Hi All,
    Our commercial tenants have asked us to consider installing insulation in the ceiling of the shop. I’ve told the property manager to get quotes but I am a little uneasy about shelling out for this cost of this. It is likely to cost double the cash flow profit that we get per annum.
    We are already receiving above market rent by a few dollars per week and it is a small husband and wife team business that have been been in this space almost 2 years.
    I don’t want to say no outright, but from a returns perspective I am inclined to reject this based on the fact it would abolish our profit.

    I wanted to hear the thoughts of other, more seasoned, commercial landlords.

    I’ve had a quick search through the forum and could not locate any similar enquiries. Thank you

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    What does the lease say? Generally with commercial, you pass on any non defined costs/upgrades/repairs to the tenant.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    The lease says:

    “7. Operating Expenses (delete if applicable)
    (i) The lessee agrees to pay the relevant proportion of operating expenses (as defined in the retail shops act) for the premises as set out below: (operating expenses are exclusive of GST, see clause 33)

    Grounds repairs and maintenance
    Building repairs and maintenance of a non-structural nature

    Air-conditioning running, repairs and maintenance

    other” (is struck through)

    So I am not entirely sure where insulation falls… perhaps at lease renewal (March 2016) I can ask the agent to include ‘Other’ and specify insulation?

    Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    BTW it is a standard 2013 REIWA commercial lease, so I didn’t list out all the included operating expenses that the lessee pays, I just listed the ones that might relate to insulation. The relevant proportion refers to the proportions per strata property.

    Profile photo of Andrew PittAndrew Pitt
    Participant
    @andrewpitt
    Join Date: 2015
    Post Count: 21

    offer to split the cost 50/50 perhaps? It will improve the quality of the property and the tenant can subsidise the enhancements

    Andrew Pitt

    Enhancing Commercial Property to Empower Business

    Steven Thomas
    Participant
    @stevenrobertthomas
    Join Date: 2014
    Post Count: 5

    With commercial RE as long as it’s not illegal, than any deal you make is as good as any other. i.e you don’t need to pay for it, if the tenant wants it, than they pay for it.
    So it’s up to you. Do you want happier tenants? Andrew’s 50-50 is a good idea. depend on the tenant though.

    I know this post was from dec, so OP how did you get on?

    Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    Thanks for your contribution. Since then they had some other demands too: on top of the insulation they wanted new glass windows, and a new back door. We declined the insulation & windows but gave them a ‘mates rates’ quote for window replacement from a friend if they wanted to go ahead (which they did) and we agreed to pay 100% for replacement of the back door (there was an OH&S concern with door getting stuck closed)… They have taken up a further 3yr option so I perceive they are happy at present.

    Profile photo of VernSVernS
    Participant
    @verns
    Join Date: 2015
    Post Count: 9

    @azalia, these are things which is worth making sure you get into the lease before they sign it…

    It’s worth negotiating… I would have said yes I’ll pay for it but I will increase your rent a little just to cover the cost of it… since it was their request and it’s making their business more pleasant to be in (I’m guessing warmer in winter cooler in summer).

    Either way – with a new lease in place even if you didn’t put it up, now it a good time to get it revalued because it may mean there is an uplift which you can use to invest elsewhere.

    • This reply was modified 5 years, 8 months ago by Profile photo of VernS VernS. Reason: spelling
    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    @azalia – you say that the tenant has exercised their option. What is the rent review at option? Market? CPI? Fixed?

    Profile photo of AzaliaAzalia
    Participant
    @azalia
    Join Date: 2008
    Post Count: 56

    Rent increase is annual by CPI which, this year was applied as 1.3%

    Profile photo of blackhotelblackhotel
    Participant
    @blackhotel
    Join Date: 2010
    Post Count: 140

    That’s funny all my commercial leases have CPI too, but minimum 3%. Strange your lawyer did not stipulate this in the lease.

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