The recent decision by NZ Retail Property Group to abandon their apartment complex in Takapuna, Auckland and to refund any deposits paid, made me contemplate the effect of body corporate fees on apartment dwellers, and for any other business for that matter. [According to NZRPG, the development has not been abandoned but pushed back until mid-2018 - Ed.]
The concept of body corporate fees is derived from the fact that a group of independent owners all own an apartment in one building and share the costs of occupation and operations.These fees accommodate such costs as security, lighting, maintenance, management and in most cases local body rates.
The same principal applies in a shopping centre environment where retailers share in the total operating expenses of the centre on an area occupied basis. Costs in a shopping centre are shared on a pro-rata basis based on area occupied and charged out as a rate per square metre.
As a result, the concept of body corporate fees in an apartment building or operating expenses in a shopping centre is pretty well acknowledged by all occupiers as a fair and reasonable form of paying for those extras!
So if the concept is accepted, where is the problem? The issue today is that the actual cost of "body corporate fee" or "operating expenses" are seriously impacting on both the user being an apartment owner or a shopping centre or commercial building tenant.
In an apartment complex, where costs of apartments to own are becoming on the fringe of unaffordable, body corporate fees can push the costs of occupation over the edge. A new apartment owner may or may not fully understand the concept of body corporate fees. While the fees may be an acceptable level at the outset, over time through an increase in wages, local body rates and repairs and maintenance, they can soon skyrocket out of control.
While $5-6000 per year at the outset of owning an apartment may sound acceptable, it may not be so after five or six years of occupation where the fees could double.
The same applies to a shopping centre tenant, where the cost of operating expenses can on occasions be higher than the rental paid. This is a serious concern for the shopping centre owner in that the value of the asset will likely decline as a result.
Similarly, fees outside of the purchase price of a residential property in particular, can create some serious issues for owners over time, particularly where in times of hardship where incomes for independent apartment owners cannot satisfy the level of fees that have to be paid to satisfy body corporate rules.
There is much more beyond just buying an apartment, and the on-going responsibilities of that owner can seriously impact on the value of the investment over time and the ability to undertake a resale and achieve a capital gain. Unlike times past where residential owners were confined to their own plot of land, and thus in control of costs, the risk in multi tenanted environments is seriously likely to impact on the viability of such ownership.
Paul Keane is a registered property professional and has vast experience in New Zealand’s commercial property industries. He provides retail and property consultancy including development management to many New Zealand property owners, developers and city councils. This post originally appeared on RCG's blog.