Service fee under scrutiny | Macro

Service fee under scrutiny

service_fee

by Anastasia Al Khatib, FM Consultant

By intelligently calculating service charges, proper asset maintenance can be ensured, which goes on to add value for property owners. Optimised fees also attract investors. When Dubai’s property market was booming, service charge fees rarely affected investment decisions. Today, however, lower rental yields and higher service charges have led owners and developers to pay more attention to how service charges are calculated.

Service charges are levied by developers to recover the cost of providing various services to buildings and public realms. Typically, developers should not make a profit from service charges, although in reality, it is common for developers to generate income in order to offset operational expenses.

Developers typically make no financial contribution to service charges, except to subsidise unsold properties or to retain responsibility for certain elements within multi-use developments, such as shopping centres and office blocks.

In the UAE, service charges are collected from unit owners rather than occupiers. Should a landlord fail to pay the required service charge, their tenants may encounter problems, such as access cards no longer granting entry to the building’s car park or swimming pool.

There are many options regarding service charge allocation, but Services Charges in Commercial Property (2014) by RICS [Royal Institute of Chartered Surveyors], states that “it should be fair and reasonable to ensure that individual owners bear an appropriate proportion of the total services provided to them”.

In mixed-use buildings, where different occupiers benefit from a range of services, costs should be apportioned proportionally to those that receive the benefit. For example, owners of ground-floor offices within a commercial tower could negotiate a discount, as they may not use the building’s lifts.

The most common service charge apportionment method in the UAE involves working out a property’s floor area as a percentage of its total sellable area, and setting the service fee accordingly. A single measuring standard, such as RICS’s Code of Measuring Practice, should be used across the entire development to achieve accurate and consistent calculations.

In large or multi-use developments, service charges may be calculated using weighted floor areas. This method progressively discounts larger areas, as it takes into account the fact that a unit’s floor area may not directly correlate to service usage. For example, a large penthouse apartment might be occupied by just one person, whereas a smaller, two-bedroom apartment could house four people, thus generating more waste and increased lift usage.

Another approach is to set service charges according to the number of people that can be accommodated in the development’s various residences. It could be argued that a studio apartment’s usage of common services may equal that of a one-bedroom unit’s, even though the former may be significantly smaller.

Service charges should cover the replacement of dilapidated assets on a like-for-like basis. As for improvements, a like-for-like replacement cost should be calculated and recovered from the service charge, with the developer making up any shortfall.

However, should an upgrade demonstrably decrease ongoing maintenance costs or significantly reduce spend on spare parts, it should be agreed whether it is reasonable for the service charge to cover the improvement.

For example, a developer may wish to replace a card-operated parking barrier that regularly breaks down with a gate operated by radio-frequency identification (RFID). While this is an upgrade, the developer could make a case that lower maintenance costs would result in long-term savings, and therefore ask that the service charge covers the replacement.

As service charges come under more scrutiny, it is increasingly important that they are transparent, that building occupiers see the benefit and value in the provision of reliable services, and that there is a healthy working relationship between all stakeholders.

This article first appeared in Construction Week.