Re-Leased

 

Building Maintenance Budget vs Direct On Charge

Ramiz Gorgees 16 December 2015


One of the major headaches our clients ask me to solve for them is the way they bill their outgoings.

Outgoings (or service charge as they say in the UK) are the costs that landlords incur and pass onto their tenants if stipulated in the lease agreement; these charges could include electricity, rates, and any common area maintenance expenses.

A landlord must provide the tenant with documentation outlining outgoings estimates and actual charges. They often have the option of directly charging their tenant outgoings, creating operating expense budgets.

The direct on-charge method works by invoicing the tenants directly for any charges incurred that you pay on their behalf, and on-charging the invoice as per the tenants’ contract agreement; see the example below.

Electricity Invoice $1000
Tenant A pays 20% of $1000 = .2 × $1000 =$200
Tenant B pays 40% of $1000 = .4 × $1000 = $400
Tenant C pays 40% of $1000 = .4 × $1000 = $400

Rates Invoice $2000
Tenant A pays 20% of $2000 = .2 × $2000 =$400
Tenant B pays 40% of $2000 = .4 × $2000 = $800
Tenant C pays 40% of $2000 = .4 × $2000 = $800

Insurance Invoice $3000
Tenant A pays 20% of $3000 = .2 × $3000 =$600
Tenant B pays 40% of $3000 = .4 × $3000 = $1200
Tenant C pays 40% of $3000 = .4 × $3000 = $1200

The standard method is to pay the three invoices on behalf of the tenants and bill them for the portion they owe. This creates a headache because the tenants will often not pay on time, and you are on-charging three separate invoices and producing nine bills. You could batch the bills that you on-charge for each tenant, e.g., send one invoice to each tenant that covers the insurance, rates, and electricity.

The problem is keeping adequate ledgers to keep track of the outgoings. In my accounting software, I would have to create one account payable invoice for the insurance, rates and electricity and break up these invoices for each tenant. Now you can see the problems I would run into if I owned 20 commercial buildings occupied by 100 tenants.

A solution to this problem is to use the direct on-charge feature with Re-Leased that integrates directly with Xero. Each direct on-charge GL code is recorded in Re-Leased and split up according to the tenancy agreement. Once you receive the bill from your vendor, enter the bill as an expense. Re-Leased will automatically take this bill, sync it with Xero’s Accounts Payable area and create all the accounts receivable on-charge invoices to be sent out to your tenants, eliminating any double and triple ledger entries that are occurring.

The other method would be to create an Opex Budget (Operating Expense) whereby you forecast the outgoings for your building and establish a budget according to the tenancy agreement, which you would bill every month to your tenant; see example below.

Building A Opex breakdown

Electricity $120,000
HVAC $200,000
Lift maintenance $30,000

Tenant 1 pays 30% of outgoings = (120,000 × .3) + (200,000 × .3) + (30,000 × .3) = $105,000
Tenant 2 pays 40% of outgoings = (120,000 × .4) + (200,000 × .4) + (30,000 × .4) = $140,000
Tenant 3 pays 30% of outgoings = (120,000 × .3) + (200,000 × .3) + (30,000 × .3) = $105,000

We forecasted that tenants one and three will contribute $105,000 annually and billed $8,750 every month for their outgoings, and tenant two will pay $140,000 annually and $11,666 monthly.

This amount will be charged every month on the rental invoice, and the owner will pay the bills as they come. At year’s end, the owner will reconcile all the invoices and match against the budgets, and if any Opex charge items go over or under the estimated amount, the owner will bill or credit the tenants for this.

This budget structure is the most favourable for both the tenants and landlord. The tenants will know exactly how much they need to pay every month, and come reconciliation time, as long as the owner has been supplying them with the outgoing bills, there won’t be any surprises when you complete your wash-up.

For the landlord, they have predictable revenue coming through for the outgoings, and you do not need to chase both the outgoings invoices and rental invoices.

The reason most landlords choose the direct on-charge method is because running and maintaining a budget for any building is a full-time job and requires hundreds of hours to manage. Most landlords run complex outgoings spreadsheets that don’t integrate with their accounting system; this becomes an issue when the end of financial year approaches and they need to reconcile their outgoings. This process can take up to two months for some landlords.

We have solved this headache in Re-Leased with our revolutionary outgoing budgets feature. We allow you to create the budget for each building and bill your tenants. Because the system integrates directly with Xero, you can enter any outgoing charges related to that building, and Re-Leased will capture this, eliminating any double ledger entries.

Our clients tell us they have saved weeks of data entry, and most are moving their on-charge tenants to budgets.

Click here to watch an overview of Re-Leased, covering the outgoings feature. If you have any additional questions or need help with your outgoings, please call me on +61 451 638 986 or email me on ramiz.gorgees@re-leased.com