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The Challenge of Rising Ops Costs

Incorrect municipal valuations and the subsequent increases in rates and taxes associated to these properties have become something of a thorny issue for both landowners and tenants alike. Any rate increases have a significant impact on both landlords and tenants alike as it pushes the property’s operating costs higher, often with far reaching consequences. Rates and taxes generally remain the responsibility of the property owner and are thus recovered from tenants, depending on the lease structure, by way of an agreed ‘Ops Costs’ charge or in accordance with the received Municipal invoices. Depending on the efficiency and accuracy of invoicing, this is becoming a serious concern as councils may at times only invoice months later and the tenant may have already vacated the property. Delayed or incorrect invoicing over a prolonged period of time can raise substantial liabilities for property owners, especially on large commercial holdings where bills can run into the millions of Rand. The cost associated with occupying a property can be split into three main categories – a capital cost, an operating cost (Ops Costs) and maintenance costs. The capital cost is associated with the capital outlay of the property, whether the occupier owns the property and pays a bond, has invested cash and endures an opportunity cost or pays rental to a landlord. The operating cost is as a result of municipal charges (rates and taxes), metered utilities consumed (electricity, water, sewer, refuse removal etc) and other sundries such as park levies. Ops Costs have increasingly come under the spotlight – as property occupiers generally have a threshold in respect of their ‘total property budget’. The higher the proportionate split of expenditure attributable to Ops Costs, the less remains to allocate towards the capital cost of ownership – essentially the net rental in the case of a landlord. Inefficiencies at council level and over charging on rates and taxes means that landlords are under pressure to do deals within much tighter margins while overall their net rentals are under duress. Similarly, as gross rental costs for tenants (or the cost of occupying a property) go up, so too are their end profits reduced. At the same time service delivery is becoming more of an issue, something the South African Property Owner’s Association (SAPOA) has long been fighting to address. The solution is that municipalities need to become more effective in their operations and open lines of communication with property owners – specifically those who have large property holdings and account for significant portions of their revenue. Improved property valuations and collection of rates and taxes across the commercial property sector would go a long way in relieving the financial burdens experienced by municipalities and quite possibly provide the necessary platforms for improved service delivery .