Further Cost Considerations

Reinstatement

Overview of Occupier Requirements

Methodology

Our model for this study is a hypothetical 1,000-sq.-m. office in a mid-size building located in the central business district of a major city in each country or region. The premises are assumed to have a typical hybrid office fit-out installed by the tenant that has sustained moderate wear during lease term.

The cost assessments for each country are based on typical high and low rates for dilapidations or liabilities and are based on USD per square meter.

The cost advice is indicative, and variations will always exist between individual properties, influenced by the lease terms and the building in question. That means the use of these rates for IFRS 16 provisioning is unlikely to meet an auditor’s requirements as it may not provide the correct liability for a given property. An individual assessment of each property is therefore strongly recommended.

Typical Lease Obligations

Reinstatement

• The reinstatement of tenant’s alterations and additions is required, returning the premises to the condition it was prior to occupation.
• The landlord will accept the tenant’s additions and alterations remain in pace at expiry, no reinstatement is required.

Process

• Both parties negotiate a financial settlement with the landlord instead of the tenant carrying out the work.
• The tenant carries out the work needed to fulfill its obligations, so the premises are handed back to the landlord in compliance with the lease at expiration.

Repair and Conditions

• The tenant is expected to keep the premises in good condition, remedying any defects and leaving it in good condition.
• Wear and tear is accepted by the landlord, but anything beyond this is considered tenant disrepair and must be remedied.

Penalties

• Apart from responsibility for the works themselves, wider penalties are uncommon at lease expiration even where the tenant hasn’t completed work.
• If the tenant hasn’t completed the work or reached a financial settlement, then the landlord can usually apply further penalties. Commonly, this will be a claim for lost rent for the period of time it would take to complete the work.

Capital Allowances

Tax Depreciation

A significant portion of property costs incurred by occupiers could be tax deductible. This is commonly referred to as tax depreciation (EMEA).

It is not uncommon to find that as much as 95% of the total cost of fit-outs or refurbishments qualifies for some form of relief, depending on the country.

Tax depreciation differs from "book value" depreciation used for accounting purposes in that it is used to directly reduce profits subject to taxation. Its methodology and calculation varies from country to country.

In most countries, depreciation allowances are calculated on a linear basis where the taxpayer deducts equal annual amounts. This is calculated by multiplying the rate of depreciation (useful economic life) by the asset’s initial value until the asset is written off in full. In other countries, a reducing-balance basis of depreciation is used, utilizing different rates of relief for different categories of expenditure.

As a consequence, if assets are not allocated to the correct category, it could affect the level of relief available and the rate at which it is realized. Therefore, project leaders should undertake a review of all capital expenditure incurred on projects to allocate all assets accurately and claim optimal tax relief. For example, in the U.K., there is a 100% first-year writing-down allowance for any expenditure incurred on green and energy-/water-efficient technologies. Similar items that don’t meet the criteria must be written-down at a rate of 8% per annum on a reducing-balance basis.

Figure 20: Tax Depreciation

Source: CBRE Insights, 2022.