Property Management - Service Charge Flashcards
RICS Guidance:
- Service charge in commercial property, 1st edition, 2023
What are the principles of the Code of Practice for Service Charge?
- Improve standards and promote best practice
- Ensure timely issue of budgets and recs – within 3 months
- Reduce the cause of disputes and provide guidance of resolutions
- Provide guidance when agreeing, negotiating, drafting and interpretating leases
What are the updates the new Code?
- Previously a guidance
- Budgets and recs to be completed annually
- Set KPI’s
- Only 100% of the apportionment can be recovered
- Separate bank accounts
- Man fees cant be based on a percentage of the management fee
- Apportionment basis – floor area, rateable value, fixed basis or weighted
What is contained in a service charge budget?
- Property contacts
- Apportionment schedule
- Tenant names
- Sqft
- Apportionment %
- Tenants apportionment figure
- Cap details
- Void liabilities
- Contract costs
- Expected repairs
- Management fee
- Schedule splits
- Details on previous years spend
- Forecast figures for the current sc year
Are there time restrictions on sending the service charge budgets to the tenants?
- Must be issued one month before the beginning of sc start date
- Company KPIs are 3 months
How is service charge apportioned?
- Based on size of the unit
- Based on rateable value
- Weighted service charge
What is service charge weighting?
- Weighting is to allow for abnormally sized units to pay what is determined a more equitable level of apportionment and in doing so contribution to the service charge.
- This recognises that the size of the unit does not represent the impact that this unit has on the common parts and the services which are required to manage the service charge.
- This is not a cap or a landlord contribution, and it does not allow for certain services being excluded (i.e. Marketing, roof repairs etc.).
When would service charge weighting apply?
- A ratcheted reduction on unit size e.g. – a percentage reduction at a certain size (i.e. 10% reduction on 10,000 sq. ft., 20% reduction between 10,001 sq. ft. and 30,000 sq. ft. and 30% reduction on any area thereafter)
- A reduction on certain floors e.g. – Upper floors are only apportioned at 50% of the floor area
How do you benchmark the budget?
- Ensure contracts are tendered every 2-3 years
Why might there be different schedules in a budget?
- Some parts of the building may not benefit from services due to be paid
How would you prepare for large costs on an old building?
- Carry out a PPM report over a 5–10-year period > incorporate this into the budget over the next five to ten years, or collect via a sinking/reserve fund.
What is the difference between a sinking fund and a reserve fund?
- Sinking fund - A fund formed by periodically setting aside money for the replacement of a wasting asset (for example, heating and air-conditioning plant and equipment, lifts, etc.).
- Reserve fund a fund formed to meet anticipated future costs of maintenance and upkeep to avoid fluctuations in the amount of service charge payable each year (for example, for external cleaning and redecorations)
Can you explain how the lease terms vary between inclusive or exclusive of service charges, rates, or insurance?
- Inclusive lease covers services, insurances, taxes.
- Exclusive leases are charges to the tenant separately.
Based on your experience, what is the significance of service charge caps?
- Service charge caps serve as a protection measure for tenants against excessive charges.
- They introduce a limit to what a landlord can recover for the provision of services and are a significant negotiation point in lease agreements.
How does the guidance note on service charges assist with managing your portfolio?
The Guidance Note on Commercial Property Management assists with managing my portfolio by providing me with the best practice processes and procedures for managing commercial property effectively and in accordance with the regulatory and legal framework.
