What are the expense and income items associated with owning commercial real estate?

How to reduce costs on commercial real estate

When it comes to commercial real estate, many people consider it expensive to maintain. However, there are types of lease agreements where the main expenses fall on the tenants, and the costs are more than covered even with a mortgage loan.

Revenues and expenses of a commercial real estate owner

Like in any other business, the income and expenses of a commercial property owner include various aspects. This includes rent, advertising to attract tenants, depreciation, and the appreciation of the property that the owner bears.

Expenses when buying commercial real estate

When purchasing commercial real estate, in addition to the cost of the property, one should consider the appraisal, realtor services, and bank fees, as well as the annual property tax.

• Indexation of rent and depreciation
• Rents for commercial properties are generally charged monthly or quarterly in advance

Tips for reducing expenses

Thus, although the initial investments in commercial real estate can be substantial, there are several ways to make it economically viable, including reallocating expenses, indexing rent, and proper property management.

Commercial real estate practice in the Czech Republic and Germany

The differences in commercial real estate practices between the Czech Republic and Germany are quite significant. For example, in the Czech Republic, most lease agreements are made for 3 or 5 years, which is a relatively long term compared to other countries. Property owners typically charge tenants VAT on the rent, which is then paid into the state budget. Additionally, in certain cases, landlords may refund part of the paid VAT as compensation for repairs or construction.

Features of Czech practice

Owners of premises in the Czech Republic have the obligation to offset the value added tax paid when purchasing the property themselves. However, some costs can be covered from the rent.

Internship in Germany

In Germany, all of this happens automatically: the state excludes VAT from the cost of the property, and the taxes related to the purchase are compensated from future rental payments.

Calculation of amortization

Depreciation represents the reduction in the taxable value of real estate due to its potential wear and tear. For example, if the value of a building is 10 million euros, of which 2 million is attributed to the value of the land, then depreciation will be calculated on 8 million.

Expenses for commercial real estate

Commercial real estate expenses can be divided into one-time and recurring expenses. One-time expenses usually amount to about 10% of the value of the property and include transaction costs, mortgage payments, taxes and brokerage fees.

• Some expenses can be covered by the rent.
• The costs for initial repairs and finishing of the premises depend on the condition of the property.

Regular expenditure

Regular expenses related to property maintenance can be partially covered depending on the terms of the lease agreement. For example, a typical rental arrangement includes only the costs for maintaining the building's load-bearing structures.

The rights and obligations of the parties in such a contract are outlined in the relevant document.

Rental issues and costs

For property owners, the key role in the process of renting out real estate is crucial. Owners may incur certain expenses, such as maintenance of the premises, insurance, and tax payments, depending on the type of lease agreement. However, there is an option to include these expenses in the rental price.

Distribution of expenses by country

Depending on the type of lease, expenses usually fall on the owners. For example, in the UK, the owner incurs minimal expenses under certain types of leases, while in France, they will have to cover repair costs, brokerage fees, and property taxes.

Rental terms by country

Rental conditions can vary significantly depending on the country.

Expenses when renting out real estate in Europe

Property owners in Europe often wonder what expenses they will incur if they decide to rent out their properties in major cities. After all, the cost of maintaining real estate can vary significantly from one country to another.

Spain

In Mediterranean countries like Spain, the rental process involves several important aspects:

• The real estateagency's commission ranges from 10% to 15% of the annual rent, plus a value-added tax (VAT) of 21%.
• Pay for interior renovations, utilities, and property taxes.

France

In France, real estate agencies charge a commission of up to 15% of the annual rent, plus a 20% VAT. Additional expenses include repairs to the premises and insurance for the facade and roof.

Czech Republic

In the Czech Republic, the real estateagency's commission ranges from 5% to 8% for office rentals and from 10% to 15% for retail space rentals, plus a VAT of 21%. There are also service fees, costs for renovations, as well as insurance for the premises and business insurance.

Switzerland

In Switzerland, the real estateagency commission is between 7% and 15% of the rent, excluding VAT. This also includes service charge, apartment expenses such as utility bills.

Additional aspects

In addition, real estate investors are advised to consider the expenses related to the founder's loan. This method allows for the optimization of the company's profit tax if the property is registered under a legal entity.

Considering the prevalence of NNN lease contracts in Europe, the owner only has to cover the capital repairs of the building and staff services, while all other responsibilities and expenses fall on the tenant.

Therefore, it is important for property owners to carefully examine all possible expenses and taxes before starting to rent out their property.

In conclusion

The income and expense items of a commercial real estate owner are very diverse and require due consideration when owning a property. One-time expenses when purchasing a property, such as purchase tax, broker and realtor commissions, as well as regular maintenance costs, including mortgage payments, utilities, insurance, management company services, and others, must be considered. However, there are types of leases where the main costs are borne by the tenants, which can more than recoup the costs. In addition, rental income can be increased by indexation of rent and depreciation. Thus, every commercial real estate owner should carefully evaluate all aspects of income and expenses to ensure successful and profitable ownership of the property.