Tuesday 17 July 2018

The right moves: Estate management and service charges add value - if you get them right

Paul McNeive
Paul McNeive

Paul McNeive

Property management and service charges are sometimes regarded as a tedious part of the business, but this area has become more sophisticated, and making mistakes can prove very costly. On the other hand, a properly structured and well-run estate management regime will enhance the 'lettability' of units and overall investment values.

I'm not surprised that experienced property management surveyor, Jerome O'Connor, has set up a specialist, service charge consultancy, and I met him to learn about the opportunities and pitfalls.

O'Connor explains that the basic aim of the service charge is for the landlord to recover 100pc of the cost of running the scheme, having apportioned the costs fairly across the tenants. This is initially achieved by devising a weighting system, to reflect that, for example, apartment occupiers on a scheme will be benefiting from less services than retail occupiers.

In the case of pure retail schemes, external-facing units will often be on a lower weighting than mall-facing units, as they get less benefit from mall security. So all costs are split into schedules, with costs solely related to a particular use allocated against that use, and costs relating to common areas allocated against all occupiers. The developer/landlord then has to devise an 'area weighting', so that large occupiers are not paying the same rate per square metre as, for example, kiosk tenants.

That's the relatively straightforward part. Things get more complicated when one realises that few schemes will ever stay the same as they were initially planned and built, so it's vital that the lease allows for flexibility in apportioning the weightings and service charge apportionments. At its simplest level, what happens when some tenants build mezzanine floors and are generating more footfall and a greater demand on services? The lease must allow you to re-allocate the charges.

At a more complex level, imagine a large scheme such as The Point Village in the Dublin Docklands, which has been developing over a number of years. Already on site are The 3 Arena, The Gibson Hotel, The Odeon Cinema, large office buildings, retail space and underground parking. Now there's an exam question for a management surveyor!

It is now being proposed to develop blocks of student accommodation, which were never envisaged in the original Point Village scheme. The point is that a good lease will allow for a scheme developing and changing, based on the principles of good estate management, whilst keeping all occupiers happy.

The management structure will also have to allow for the different attitudes of particular tenants to service charges. Many retailers have a cap on the level of service charges and management fees they pay, others won't contribute to marketing of the scheme through the service charge, while anchor stores often insist on handling their own waste disposal.

I strongly advise that before any new scheme is marketed, that the estate management, service charge and mapping issues are already sorted out. Over the years I saw several deals lost at contract stage, because these issues hadn't been thought through.

Jerome O'Connor goes further and recommends that before the sale of any investment property, the landlord should conduct a due diligence of the management company and service charge, to identify potential problems and avoid price chipping by a purchaser at contract stage, as problems emerge. A purchaser should do the same exercise, before signing.

Service charges are particularly driven by human costs, such as security and cleaning. Typical modern office block charges are €80 to €120 per sq m, €140 to €150 per sq m for shopping centres and €20 to €50 per sq m for good business parks. Managing agents fees are typically 8pc to 10pc of the service charge costs. An important element is the 'sinking fund" which is an annual allocation to deal with large future costs, e.g. lift replacement. Surprisingly, O'Connor told me that 20pc to 30pc of new leases make no provision for a sinking fund; this is short-sighted.

A well-operated management company will increase the attractiveness of a scheme for both tenants and purchasers, while the opposite applies equally. Service charges also deserve forethought as there is little point in designing a brilliant letting strategy which positions you at a lower rent than competitors, if your service charges are particularly high due to inefficiencies.

Launching 'The Manhattan Project'

A reminder that my novel, 'The Manhattan Project', is being launched this evening by RTE broadcaster Aine Lawlor in Hodges Figgis, Dawson St at 6pm. All are welcome to join us in this historic bookshop.

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