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Real Estate & Construction

What’s new in office-property operating costs?

By Magdalena Oksańska, head of property management compliance, Knight Frank
Header oksa ska magdalena  2 color 09.2017


Operating costs in office properties are constantly changing. The only constant is their systematic growth, even though last year it was not so drastic. There are many reasons behind these increases.

Changing regulations result in higher employment costs. Each year, the minimum wage and hourly wages are rising.

On the other hand, rising media costs constitute about one-third of operating costs. Electricity, in particular, has an indirect influence on the remaining cost components. Electricity prices were frozen in 2019, but in the long run it will be impossible to keep them on the same level, and we should expect them to rise on an annual basis.

Paradoxically, state-of-the-art properties are not the most cost-effective in terms of energy. Users’ demands are rising –  better air quality, more lighting,  have made property systems which ensure comfortable working conditions even more energy-consuming.

Property tax depends on inflation, while perpetual-usufruct fees are linked to market land-price. Inflation is on the rise, and land prices are moving up as well.

The chart below illustrates changes in office property operating costs within the last few years. In 2018 their level changed only by between 1%-2% in comparison to the previous year. In 2019, as well as in the years to come, the cost of electricity will have a crucial effect on many aspects.

Should office property marketing be part of operating costs?

Within the last few years, the marketing of office properties has been developing. Property owners and managers follow the example of shopping malls, and try to organise various events for employees of companies which lease offices to address their needs and expectations or simply make their day better. Events which seem useful for all are held daily, while bigger events connect to ecology, saving the environment, sport and charity are also organised.

Rumours have been swirling on the real estate market that the costs of such marketing events will soon become part of the standard operating costs paid by tenants in office properties.

This seems to be a rather far-fetched interpretation. The marketing fee in shopping malls is legitimate cost to the tenant. Marketing events here are aimed at attracting footfall and clients, resulting in increased sales for the tenant. In office properties, however, the property owner's only concern is for the property users (employees of tenant companies) to have a comfortable life in a particular property, which does not directly influence the tenant's earnings.  It's rather unlikely that companies will accept additional costs of attractions for employees. Of course, they are welcome, sometimes even expected, but not as a cost for the tenant.

The key, as usual, is to be found in the provisions of the lease contract. So far, no tendency can be observed on the market to include the additional element of marketing events, aimed at building the brand of the property or its owner, on the long list of operating-cost components

Property income tax

Formerly known as commercial property tax, and introduced on 1 January 2018, the minimum income tax is interpreted by some property owners as a component of operating costs (even though it is not market practice). Taking into account the standard provisions from lease contracts, there is no baseline to reconcile the subject tax in the property's operating expenses. It has been introduced as an amendment to the Act on Income Tax. The fact that it applies to CIT and PIT taxpayers who are owners of leased properties, makes it possible to consider it an income tax.

This tax has been widely discussed on the real estate market, and the option to reconcile it in operating costs carried by the tenant. The majority of property managers, however, agreed with office property owners and did not include the costs due and paid by means of commercial property tax (property income tax) in reconciling operating costs for 2018 and in the budgets for 2019.

Waste in commercial properties

Within the last years, waste disposal costs have risen significantly. It was a result of legal changes introduced a couple of years ago, and the obligation to pass communal waste to companies chosen by the city to collect it, as well as the fact that the majority of office properties have declared that they would collect mixed (rather than segregated) waste. The fee itself, in form of a tax, was much higher than the offer of private companies, with the segregation cost only adding to the total price.

Currently, tenants will have to get used to segregating waste into five parts. These rules are already in operation, and additional fines for not segregating will be very high. The latest changes in the legal act will most probably lower a little the cost of transporting waste from commercial properties. The act gives property owners the option to resign from city services in favour of having a direct contract with a private company which have so far offered much friendlier rates.

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