The owner’s willingness to negotiate rental depends on a number of factors, especially the length of time for which the premises have remained vacant as well as general vacancies in the area. Other factors that will be considered are the tenant’s credibility, alterations required to the premises, the length of the lease and market rentals.
In terms of the National Building Regulations SABS 0400-1990, it states that any building with a floor area exceeding 2500m², or where any racking / stacking exceeding 3 meters in height, the area requires protection by an automatic fire sprinkler system. In addition, where the floor area exceeds 5000m², an early warning smoke detection system must also be installed.

For a 6000m² warehouse, the following options must be considered:

  • The entire building is to be fully sprinkler protected to SABS 0287 regulations
  • Water storage tanks and fire pumps may be required based on the design density of thee sprinkler system and whether in-rack sprinklers are required (if stacking exceeds 3 meters)
  • The warehouse and office component can be subdivided up into fire divisions of less than 2500m² in floor area by means of full height 60 minute rated firewalls with Class B fire doors (2 hours) to omit the sprinkler installation (but the stacking may not exceed 3 meters in height)
  • Alternate fixed fire protection systems such as a high expansion Foam Flooding System or an Inert Gas Flooding System can be considered but these installations are very costly and impractical in this instance.
Most property owners appoint brokers on a non-exclusive basis to lease the premises on their behalf. The owner grants the agent a performance-based mandate. This means that the agent earns a commission payable by the landlord/owner on conclusion of a lease agreement.
  • Firstly ask yourself why are you moving?
  • Do I require additional space / less space?
  • Is my current location no longer desirable and convenient?
  • Are my rentals above market?
  • Are my landlord/managing agent maintaining the building and providing a satisfactory service?
  • Does the configuration of my current office space provide the right work environment?
  • Do my premises portray the right corporate image for my brand/company?

Having assessed the above and determined that the move is necessary, you will need to employ services of the 5th Avenue Properties to determine:

  • Rental levels and vacancies in desired locations
  • Space planning exercise to determine optimum size required
  • Tenant installation allowance provided for new premises
  • Assist in lease negotiations
Lease Structures

The Gross Lease
In the gross lease the lessee pays a fixed rental escalating at a predetermined rate per annum and includes all operating costs, rates and taxes which are the sole responsibility of the lessor (generally excluding electricity).

The Net Lease
The net lease separates the net rental from the operating cost and rates and taxes and each component generally escalates at a different percentage per annum. The operating costs are the sole responsibility of the lessor, excluding electricity.

The Triple Net Lease
This agreement accounts for the net rental only with all operating costs, rates and taxes, etc. being the responsibility of the lessee.


Rental Structures


Net Rental
Net rental excludes operating costs, rates and taxes, VAT and electricity. The net rental also excludes parking rentals.

Operating Costs
Operating costs include the running expenses of a building, the most common being the following:

  • Building insurance
  • Refuse removal
  • Sanitary fees
  • Provision of toilet services
  • Building security
  • Garden maintenance
  • Air conditioning maintenance
  • Lift maintenance
  • Cleaning of common areas
  • Common area electricity
  • Building maintenance
  • Management fee
  • Water

Electricity consumed in leased premises is usually separately metered for the account of the lessee. The cleaning of the leased premises are usually also excluded from operating cost and separately paid for by the tenant.

Rates & Taxes
Rates and taxes are usually allocated on a pro rata basis in terms of lettable area versus total lettable area of the building, and are adjusted as and when local authorities alter their assessment rates payable in respect of the property.

Value Added Tax
The net rental operating cost and rates and taxes usually exclude VAT, which is added on the total amount on the rental statement.

Gross Rental
Gross rental includes the following:

  • Net Rental
  • Operating Costs
  • Rates and Taxes

The gross rental excludes VAT, services charges such as electricity consumption, water consumption, etc. Parking expenses and VAT. When alternative proposals are evaluated the gross rentals in each proposal should be compared with one another.


Parking Rentals


Parking bay allocations are usually based on a number of parking bays per 100 m2 lettable space. Office buildings are obliged to provide X number of parking bays per 100 m2 lettable spaces depending on the zoning rights of the specific property. However, each building has a specific ratio that is applicable to the different types of parking bays available, for example covered parking and open parking space. Parking rental is over and above the cost not included in gross rental. A separate parking lease may be required in certain instances. Parking rental usually escalates on all annual basis or at a predetermined escalation rate.


Office Installation Allowances

Depending on the prevailing demand / supply situation standard office installation costs will either be covered by the landlord or required as additional costs from the tenant. The allowance is usually based on a list of specifications applicable for a specific building. These specifications refer to partitioning division, doors, wall finishes, floor finishes, power and telephone outlets, lighting levels, air conditioning outlets, thermostats and louver drapes. The allowance is based on the lettable area and most landlords also offer a free design service to assist you in laying out your premises.


Lease Agreement Criteria


Lease Periods and Option Clauses
Generally landlords require a lease term of a minimum of three years. Fitting out allowances are usually also dependant on the length of the lease. For lease periods exceeding five years a rent review would be a pre-requisite. Options to renew a lease after the expiry of an initial term can be granted.

Turnover Rental Clause
Turnover rental clauses are usually applicable to shops and restaurants.

Insurance
Insurance with regard to the leased premises must be arranged by the tenant.

Bank Guarantees / Deposits and Surety ships
Landlords will require either an irrevocable bank guarantee to a negotiated amount as a deposit for the duration of the lease agreement of personal surety ships may be required from the directors or members. The latter indicates confidence of lease signatories in their own business which is obviously an assuring factor to landlords.

Hypothec
Most companies that lease equipment to tenants require the landlord to sign a hypothec waiver in the event of the tenant’s default in their commitment to the landlord. The landlord must be in possession of the signed hypothec waiver.

Payment
Monthly rental is usually payable in advance on or before the first day (which is not a Saturday, Sunday or public holiday) of each month. Lease fees and deposits are payable on or before the earlier of the date on which the tenant takes occupation of the leased premises.


Building Management


Maintenance
The tenant is liable for maintaining at his cost the inside of the leased premises in good order and condition, fair wear and tear accepted. The exterior of the building and internal common areas are the responsibility of the landlord.

Security
The landlord usually provides building security. The tenant is however in normal circumstances responsible for security and insurance with regard to the leased premises.

Cleaning Services
In most instances the tenant is responsible for the cleaning of the inside of the leased premises and the landlord is responsible for the cleanliness of the common areas and parking areas.

Attendance
Most buildings have a set of house rules which provides the tenant with important information with regard to hours of attendance, building management, staff, air conditioning, parking, transport of stock in and out of the building and fire drill procedures.

With workspaces evolving it is worth planning your space through a simple space planning exercise to assess the correct space required. Selecting the correct space up front allows you to use your space as a strategic asset, inspire and envision your organisation.

We are able to put you in touch with consultants who can provide an at risk space planning assessment whereby they can calculate the space you require and incorporate your growth. This is done in a scientific manner to display how much space each department requires as well as all special facilities.

Building evaluations can be done. These evaluations ascertain the efficiencies of the building and the scope of work needed to be carried out on the building in order for it to meet your requirements.

They are also able to touch on the softer issues which are the compatibility between your building and your staff requirements e.g. transportation, where they live, facilities in the area etc.

Facilities are nothing other than “tools” to expedite bottom line return for shareholders. Many companies in South Africa sadly are attempting to function optimally in poorly selected and planned buildings. Let us assist you in selecting and establishing an efficient and effective office environment that is happy, healthy and productive, which is flexible to adjust to tomorrows ever changing needs and which enables dynamic companies to retain professional staff and to attract the very best calibre recruits when required, all at a “low cost” of ownership of a facility.

With investors seeking yield enhancement for their portfolios or longer term hold strategies, it simply doesn’t make sense for certain corporates to retain their freehold property. Advisors are able to assist in unlocking the embedded values of such properties.

Proceeds from the sale of these properties are fed back into the core business. This generates a higher return on capital than the cost of the funds. For the purpose of the core business this offers a far more attractive commercial proposition.

How the seller benefits:

  • Capital is freed up to fund Capex, merger or acquisition activity.
  • Funds can be reallocated to core business activities.
  • Realise your tax benefits. Offset the lease costs as an operating expense.
  • Seller remains in day-to-day control of the property.
  • Improve your balance sheet through the cash sale of your property. By pricing the property just below market value, investors are attracted.
  • One off income statement (profit), reflecting the realised profit over book value.
  • The property value risk is transferred to a third party, on a fully transparent basis.
You will be charged for consumables, like water, electricity, refuse and sewerage; the maintenance of air-conditioning, as well as parking and storage.
Operating Cost Schedule

  • Security
  • Rates and Taxes
  • Building Insurance
  • External Building Maintenance
  • Garden Maintenance
  • Air Conditioning Maintenance
  • Management Fee
  • Audit Fee
  • RSC Levies
  • Common area electricity
  • Common area cleaning
  • Lift Maintenance
  • Provision of toilet services
  • Bank Charges
  • Pest Control

The above items are in most instances included in the operating costs and if not will be stated separately in the lease agreement.

Consumption Charges

  • Electricity
  • Water
  • Refuse and sewerage charges

These are charged as per consumption and are not included in the operating costs.

In broad strokes the following is required (even though SARS will go into more detail depending on the specific circumstances of the transaction:

  1. The seller has an existing tenant in the property that he is selling (and therefore the entity is income earning)
  2. The seller sells the property to the purchaser, and the purchaser will in effect replace the seller as the tenant’ landlord (and therefore take over the income earning activity)
  3. The tenancy will extend beyond the registration of the property.

The tenant and the purchaser have to be separate entities, even though they may have the same members / shareholders. Please keep in mind that the ultimate decision lies with SARS on whether the transaction conforms with SARS’ requirements and be zero rates. It is still possible that SARS declines the application for zero rating, even with this clause contained in the sale agreement. It all depends on the circumstances in the transaction. SARS can at any time rule that the transaction cannot be zero rated (even after it was submitted to SARS and the VAT exemption lodged and registered with the transaction in the Deeds Office), at which time the purchaser will have to pay the VAT over to the seller so that the seller can submit the VAT to SARS.

The landlord provides an allowance for any alterations to the premises. This amount is intended to be a contribution only. Any amounts exceeding the allowance are for the tenant’s account.
In a property sale, the brokers commission, or fee is paid by the seller. It is normally a percentage of the selling price, based on industry norms and forms part of the selling price. This fee is payable on transfer of the property into the name of the purchaser.

In a lease, the broker’s commission is paid by the lessor (landlord). This is normally a pre-arranged percentage of the rental based on industry norms.

Property escalations rates have no direct relationship with the rate of inflation.

Investors have a choice of possible investment vehicles which range from the money market, stocks and bonds, to property and they compare the returns /risks involved before making an investment.

A landlord/investor requires an annual % return on their investment, regardless of where the money is invested. In property, this return would be a combination of both the rental income and the capital growth of the property. In developing his property investment model, the landlord would project his cash-flows and returns for 10 years, taking into consideration the risks associated with potential vacancy factors, maintenance costs etc.

Proactive agents have knowledge of sites available to lease that may not be listed or available for the open market. Because brokers hold non-exclusive mandates from a large number of institutional property owners, they are able to show you the most comprehensive list of suitable properties. Moreover, an experienced broker has the market knowledge to negotiate a competitive rental.
Leltable area includes a proportionate percentage of common areas, such as entrance foyers, stairwells and toilets. Usable area is the balance of space left for the tenant’s exclusive use.
Income from a property calculated as a percentage of value. The rental yield is calculated, by dividing the annual net rental received by the asking price of the property.

i.e Net monthly rental R 10 000.00
Operating costs R 2 500.00
Parking – monthly R 1 900.00
Gross Monthly rental R 14 400.00
Total net monthly rental R 11 900.00
Annual net rental R 142 800.00
Asking price R 1500 000.00
Calculation R 142 800.00 ÷ 1 500 000%
Selling yield 9.52%
Alternatively if a seller is selling his property on a yield basis and provides you with the net annual income, you can determine the selling price as follows:
Asking yield 11%
Annual net rental R 142 800.00
Calculation R 142 800.00 ÷ 11%
Selling price R 1 298 000.00

 

 

To do a comprehensive valuation on a property, it would be best to calculate the internal rate of return (IRR). The IRR is calculated by first determining the total cash flow derived from an investment during the anticipated investment period i.e. 10 years and then calculating an annual investment return %. This % is calculated by discounting all the net annual cash flow’s to a net present value of nil, thereby resulting in an annual investment return % which takes all the cash flow generated from the investment into account. It is imperative to ensure that all the outgoing expenses are accounted for in determining the net annual income i.e.

  • Rates and taxes
  • Common electricity
  • Insurance
  • Security
  • Building maintenance and repairs
  • Levies
  • Commissions, marketing costs, advertising etc
  • Income tax
  • Capital gains tax
  • Transfer and bond registration costs (transfer duty, VAT etc)
  • Property financing (bond amount, bond period, interest rate, deposit)
  • Additional operating costs

As can be seen from the list of the variables above, the IRR will provide an investor with the most comprehensive and accurate indication of investment return.

Find the right property

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