Occupancy costs are the costs associated with the property of the business. It includes rent, real estate, insurance, and property tax. Occupancy cost is the second highest cost that the company has to bear after the personnel cost. This cost is almost equivalent to the IT expenses of the company. The amount of occupancy cost affects the cost of products and profit margin of the firm. It must be dealt with in a way that it encounters all the requirements of the business in the minimum possible amount.
Experts are of the view that occupancy costs cannot be taken just like rent, but it is important to pay attention to the culture of that organization when determining the overall occupancy cost. Many other factors can also have an impact on the occupancy cost of a property, and here are some of them explained by TPM Builders, one of the finest asset and property management companies to help you with everything related to your investment.
Elements Constituting Occupancy or Operational Cost
Operating costs or occupancy costs include all the costs associated with the property of the company and its maintenance. In addition to the rent of the property, there are various fixed and variable costs that the company has to bear annually.
Leasing cost is the major component of the occupancy cost after the rent. A certain lease amount has to be paid annually for commercial properties. This amount depends on the size of the property.
For instance, for a 10k sq. Ft. Space the occupancy cost is $10 per sq. Ft. The company or the business have to pay $100,000 per year for this space. Which makes $833.33 per month added to the property rent.
Occupancy cost usually differs from one year to another depending on the yearly budget. For instance, if there is very less snow this year, it may affect the budget of the landlord which in turn change the occupancy cost for the next year. The occupancy cost is also variant in different areas and for a different type of spaces or buildings.
This cost is paid in the name of leases to the landlords. It mainly includes property tax, insurance of the property, maintenance services, general utilities like parking lobby and water and sewerage, and management and landscaping costs. It also includes removal of snow and gas and electricity charges in some leases. The tenants have to be vigilant while setting terms for occupancy costs as it may not include some crucial aspect and they might have to bear them separately apart from occupancy cost.
Factors Affecting Occupancy Cost
The ever-increasing demand and sale of the property directly affect the percentage of the tax. The taxing authorities keep on increasing the property tax based on their sale to generate more revenue.
Utility charges are often kept on increasing. They hardly diminish, but the tenants can restrict their use of water and electricity to reduce their occupancy cost.
The insurance rate varies from area to area depending on the security situations in a particular place. The more secure places are charged comparatively lesser insurance rate as compared to the highly vulnerable areas.
Landscaping cost is the cost that is controlled by the landlords. The tenants and landlords can decide upon the terms for keeping it low or high depending on the requirements of the business.
Security charges are dependent on the type of business and vulnerability of the area. Higher are the security requirements of the business higher will be the security rates and vice versa.
Reducing or Controlling Occupancy Costs
Here are some steps that may help in reducing the occupancy cost:
- Occupancy cost can be decreased by selecting a smaller piece of property for the business purpose.
- It can be reduced by increasing the effectiveness of the space by adding more work in free space.
- It can be controlled by shrinking the working cubicles size of each employee.
- The employees who usually work outside the office should be assigned a common shared space instead of individual cubicles.
- Hiring home-based or virtual employees will also help in saving the occupancy cost.