New commercial tenant wanting heat pumps

[ronniegal]

We have a new tenant moving into our premises who have asked for heat pumps to be installed. How can we calculate this into the rent? They would be on a 3 year lease with 2 rights of renewal. Appreciate your help.

[WaterfrontNZ]

Take the price of the heat pump and instalation and devide it by say 6, to get a monthly rate, then add it onto the rent? Then drop the rent after the 6 months. Or devide the price by how often they will pay rent over the 3 years, and add it on?

[ronniegal]

That's how I had initially thought about calculating it, but then wondered if there should be a percentage calculation as in improvements. If just dividing the price over the initial three years is the way to go - that is much easier. How would I go about rent reviews? Can I then include the heat pumps in any rent review or would that be unfair?

[WaterfrontNZ]

What you could do, is say split it over the first year (it wouldn't bump the rent up too much over an entire year) then just leave it the same. Then in any rent reviews after that, you can just forget about it, as you have made your money back, and the rent has been sitting a little higher. Or split it over 6 months, butt hen keep it at the same price for a year... I guess whatever works out to be the best.

[Ivan McIntosh]

What my landlord clients usually do is to get it paid back monthly over the period until the next rent review, at which time you have a more valuable premises to get reviewed on.

If there isn't long to go until the next review, then whatever period works for both parties....it's just negotiation. Improvements rent doesn't come into it...that's for things the landlord is compelled to put in, not for things put in by mutual agreement.

[ronniegal]

I would be looking at two-yearly rent reviews so the cost of two heat pumps and installation could amount to close to $7000 which over two years is still nearly $300 extra per month. Will put it to the tenant. At this point still waiting on quotes, so hard to put a definite figure on it. On another note, thinking also of including outgoings in the annual rent and readjusting the figure at year's end. Is it fair to add a small percentage, say 5% to the figure to compensate for us having to pay outgoings upfront? In the past I have invoiced the tenant for outgoings when I am billed, but it appears to be an uphill battle with some tenants to actually pay promptly.

[Ivan McIntosh]

Don't forget to incorporate an interest component into your heat pumps calculation. The money you expend, and take two years to get back, costs you.

If you bill tenants for outgoings as they come in, and they take their sweet time paying, then you are well within your rights to charge penalty interest. You won't have to do it often to make your point.

If you have sigificant payments to make up front, such as insurance, then perhaps bill those separately and have the rest spread out as a monthly addition to the annual rent.

If you want to have everything as a monthly addition to the annual rent, then you can't charge an additional 5% uless you put such a clause entitling you to do so into the lease itself. As the normal lease stands, you recover what you expend, nothing more.

[ronniegal]

Re the 5%, I did not mean to actually pocket this over and above the actual outgoings. Rather, to cover any eventual increases over the year, with an adjustment at the end of the year for actual outgoings paid and amount received from the tenant. In the case of insurance, however, if I pay the annual premium upfront, that is cheaper than paying the premium monthly. Therefore I lose interest on the money I have expended up front, but the tenant benefits. I definitely want to be transparent in this, and have always been fair with our tenants, so perhaps the easiest way is for me to pay the insurance monthly or quarterly and pass on the added cost of this arrangement to the tenant. Or, as you suggest, bill the tenant for the insurance separately.

Didn't think about incorporating interest on the heat pumps - thanks for that. You have been very helpful.

[Wayne]

For outgoings I send the tenant the invoice (copy of) as soon as I get it and ask it to be paid (usually) the day before the due date to not incur the council late fee (if rates). So far I have gotten the money at the same time I have paid.

[ronniegal]

Yes Wayne, I have done that in the past too. Doesn't always work and with some of those tenants who delay payment, I do bill them for penalties. Some it just doesn't seem to make a difference, and they pay the penalties time and time again! I think that by having the tenant pay the outgoings as an addition to the rent on a monthly basis, it takes away the hassle of having to send out invoices all the time and following up.

[DaveW]

I now always add OPEX to rent to have a gross lease. It provides a more professional service which I think tenants pay more for.