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Author: Mike Hoeft

  • Decoding Your Lease Exit: Tenant’s Guide to Dilapidations in NZ

    Decoding Your Lease Exit: Tenant’s Guide to Dilapidations in NZ

    The End of Lease Challenge: Dilapidations in NZ Commercial Leases

    What Are Heads of Claim in a Dilapidations NZ Commercial Lease?

    Facing a dilapidations NZ commercial lease exit? Learn about heads of claim, the secret defence of supersession, and strategies for a smooth lease exit in NZ.

    A landlord’s Schedule of Dilapidations is a detailed breakdown of alleged breaches of your lease. It’s not just about physical repairs — the claim is itemised into different categories known as heads of claim.

    1. Reinstatement of Alterations — An obligation to remove your specific fit-out (partitions, private kitchens, specialist lighting) and return the space to its original base build condition.

    2. Repairs and Maintenance — The cost of fixing any items that have fallen into disrepair or have been damaged during your tenancy, beyond what is considered fair wear and tear.

    3. Redecoration — A requirement to repaint and re-carpet the premises, often to a specified standard or colour, as outlined in your lease agreement.

    4. Loss of Rent — A claim for rent for the period the landlord is unable to lease the property because they are undertaking the repair works that were your responsibility.

    5. Professional Fees — The landlord can claim the costs of their consultants, including the building surveyor who prepared the dilapidations schedule and the lawyer who reviewed the claim.

    The Secret Defence: Supersession

    One of the most powerful arguments a tenant can make is supersession. This legal concept applies when a landlord’s own plans for the property render the tenant’s repair obligations pointless. For instance, if the landlord intends to gut the premises for a full refurbishment, they cannot logically claim for you to repair walls they are about to demolish.

    In New Zealand, the burden of proof falls on the tenant to provide clear evidence of the landlord’s intentions, such as lodged building consents, architectural plans, or board minutes approving a redevelopment — all dated at or before the lease expiry.

    Key Strategies for a Smooth Exit

    Pre-Lease Diligence: Before signing, insist on a detailed Schedule of Condition to document the property’s state. This is your baseline and best defence against liability for pre-existing issues.

    Early Engagement: Open a dialogue with your landlord well before your lease ends. Understanding their future plans is invaluable.

    Scrutinise Every Item: Do not accept a dilapidations claim at face value. Assess each head of claim for validity, cost, and whether supersession applies.

    Are you facing a lease exit and unsure how to navigate the complexities of your make-good obligations? Contact Klug for expert guidance.

  • Network Planning in Commercial Real Estate

    Network Planning in Commercial Real Estate

    Network planning is a critical discipline for commercial real estate operators. It helps you grow and optimise your portfolio. In a market like Auckland, getting one site wrong can drag down an entire portfolio. Furthermore, getting the network right can unlock years of compounding value. As corridors densify, greenfield areas come on, and regulations shift, a deliberate plan becomes essential. Network planning is how you move from one-off, reactive deals to a strategic approach for where your capital, projects, and tenant relationships should go next.

    What Is Network Planning in Commercial Real Estate?

    Network planning is the discipline of deciding where, when, and how to grow or reshape a portfolio. It ensures you are in the right locations, at the right scale, for the right customers. Rather than looking at each asset in isolation, you look at the region as a whole. In addition, you map demand, competition, and growth to design a network that works as a system.

    For owners, developers, and occupiers, that usually means answering five core questions. Where is our customer today? Where will they be in 5–15 years? How many locations do we need? What role should each location play? In what sequence should we invest, refurbish, relocate, or exit?

    Why Network Planning Matters More for Commercial Real Estate Now

    Shifts in population, hybrid working, e-commerce, and transport infrastructure mean yesterday’s prime is not always tomorrow’s. Furthermore, zoning changes can quickly alter what was once a strong location. A mis-step in location or timing is expensive to unwind once you’ve committed to land, consents, and build.

    A robust network plan helps you put capital into locations that genuinely grow catchment and market share. As a result, you can defend high-performing nodes before competitors arrive. You can also exit or repurpose assets that no longer fit the long-term shape of the network.

    For occupiers – particularly supermarkets, large format retail, trade, medical, and service brands – network planning is essential. However, it is not just about finding locations. It is how they maximise accessibility and visibility to their ideal customer while controlling occupancy cost and operational complexity.

    The Building Blocks of Effective Network Planning

    Market and catchment definition — Breaking the region into consistent zones. Then, mapping population, spend, and growth at meshblock or area-unit level. This lets you clearly see where you are over- or under-represented.

    Demand and sales-potential modelling — Translating demographics, income, and worker population into revenue estimates. For example, road patterns and drive times help predict what each area could support by format.

    Competitive mapping — Plotting existing and proposed competitor sites and their formats. In addition, realistic trade radii show where you need to defend, where you can attack, and where the risk of new entry is highest.

    Store and site roles — Deciding which locations will be anchor sites that define a region. Furthermore, which are convenience or infill, and how each should be sized and specified to suit its role.

    Capital and timing — Sequencing new builds, refurbishments, relocations and disposals into a coherent capex program. This program spans 5 to 10 years. As a result, it lines up with business planning cycles and funding capacity.

    Where Propensity Modelling Fits In

    Traditional network planning tells you where the structural opportunity is. It identifies population, spend, and competition. However, propensity modelling adds a deeper layer. It asks: of all these people and properties, who is actually most likely to act?

    Propensity modelling is a statistical technique that predicts how likely an entity is to take a specific action. For example, it can predict buying, selling, visiting a site, or adopting a new format. Instead of treating every high-growth meshblock equally, you weight them by propensity. As a result, you focus on people who are not just able, but likely, to shift spend, change shopping patterns, or transact in the next cycle.

    Turning Analysis Into Action

    1. Diagnose the current network — Map your existing portfolio, trade areas, and performance by site. Then, overlay population, spend, and competition.

    2. Model future demand — Use growth forecasts, infrastructure plans, and land-use changes. This helps you understand how each trade area will evolve over the next 5–15 years.

    3. Layer in propensity modelling — Highlight which customers, locations, and properties are most likely to generate new revenue. Furthermore, this reveals the best opportunities for transactions or deals.

    4. Define the target network — Set clear roles and formats for each existing and future node. In addition, decide which to expand, refurbish, relocate, or retire.

    5. Prioritise and sequence projects — Turn the strategy into a prioritised roadmap. This roadmap covers specific projects, timelines, and capital allocations.

    If you’d like to talk through how network planning and propensity-driven site selection could apply to your portfolio or upcoming projects in Auckland, contact the Klug team.

  • RICS Service Charge Standard 2025: What It Means for NZ

    RICS Service Charge Standard 2025: What It Means for NZ

    The RICS Service Charge Standard 2025 has just raised the bar on OPEX transparency. Here’s what NZ landlords, tenants and investors should take from it.

    RICS released the second edition of its Service Charges in Commercial Property standard in June 2025, with full compliance required by 31 December 2025. It is the biggest overhaul of service charge governance in nearly a decade. It is a UK mandatory standard — but the principles apply directly to how we manage OPEX in New Zealand.

    At Klug, we believe the best commercial property decisions are shaped by international best practice, not just local convention. We have mapped the key RICS principles against the NZ framework to show where we align, where the gaps are, and what smart operators should be doing now.

    Why OPEX Costs Matter for NZ Commercial Property Under the RICS Service Charge Standard 2025

    OPEX is one of the most underestimated costs in commercial property. Based on industry benchmarking data, it adds between 8% and over 50% on top of net rent — depending on asset class, building grade and location.

    Office: 14–19% for premium CBD through to 40–56% for C-grade. Fringe offices sit at 28–40%.

    Retail: 15–25% for large format up to 35–50% for secondary suburban. Shopping centres run higher due to shared services, marketing levies and centre management.

    Industrial: The leanest sector. Prime logistics at 8–14%. Standard warehouse at 12–20%. Older or multi-tenanted stock can hit 20–30%.

    The cost drivers — rates, insurance, body corporate, management fees and retail marketing levies — are all climbing. Auckland Council commercial rates have risen 5–8% per annum. Insurance costs are up sharply, especially for older buildings and flood-prone areas.

    OPEX governance is not an afterthought. It is one of the most important issues in commercial leasing today.

    Key Changes in the 2025 RICS Standard

    The second edition tightens five critical areas:

    1. Budgets and timelines — Budgets issued at least one month before the service charge year. Year-end accounts within four months.

    2. Transparency — All commissions, rebates and procurement discounts disclosed and passed through. Apportionment matrix provided. Digital access expected.

    3. Financial controls — No more than 100% cost recovery. Discrete bank accounts. Interest credited to tenants. Independent certification of year-end accounts.

    4. Management fees — Percentage-based fees prohibited. Fixed fees only. Tied to service charge management, not rent collection or asset management.

    5. Non-recoverable costs — Void costs, capital works, vacancy marketing and landlord investment costs cannot be recovered from tenants.

    NZ vs RICS: How Does New Zealand Compare?

    NZ commercial leasing is governed by the ADLS Deed of Lease, now in its 7th Edition (late 2024). There is no NZ equivalent of the RICS mandatory standard. The 7th Edition has closed some gaps. Significant differences remain.

    Where NZ aligns: Annual outgoings budgets required. Tenants can request supporting evidence. 24-month recovery deadline on uncharged outgoings. Capital charges excluded from utility recovery. Arbitration and mediation standard.

    Where NZ falls short:

    Insurance commissions: Landlords and managers commonly retain commissions and rebates without disclosure. RICS requires full transparency and pass-through. This is the biggest gap.

    Management fees: NZ uses percentage-based fees (typically 3–5% of gross income). RICS prohibits this — it creates a perverse incentive to increase costs.

    Reconciliation deadlines: No mandated timeframe for year-end OPEX accounts. RICS requires four months.

    Independent certification: No requirement for independent verification. Tenants rely on the landlord’s word.

    Fund segregation: OPEX funds typically commingled in trust accounts. RICS requires discrete accounts with interest.

    What To Do Now

    Landlords and Property Managers: Issue OPEX budgets at least one month early with commentary on cost drivers. Set a 4-month deadline for year-end reconciliations. Move to fixed management fees. Disclose all commissions and rebates. Publish your apportionment matrix.

    Tenants and Advisors: Use the RICS Standard as a negotiating benchmark. Request RICS-aligned OPEX provisions even on ADLS deeds. Push for independent certification on major tenancies. Negotiate OPEX caps. Insist on audit rights.

    Developers and Project Sales: Structure OPEX with RICS-aligned transparency from day one. It makes assets more attractive to institutional buyers and tenants. For mixed-use, the apportionment matrix is critical.

    OPEX Governance: A Competitive Advantage

    Well-managed OPEX builds trust. Tenants stay longer. Vacancy drops. NOI stabilises. Asset values hold. Poorly managed OPEX does the opposite — unexplained cost increases, opaque reconciliations and percentage-based fees that climb with costs erode the tenant relationship.

    OPEX governance is not a compliance exercise. It is a competitive advantage. With OPEX adding 8% to over 56% on top of net rent, the stakes are too high to ignore.

    To discuss how OPEX governance applies to your portfolio or project, contact the Klug team.

  • Reading a Commercial Valuation: 10 Jargon Terms Explained

    Reading a Commercial Valuation: 10 Jargon Terms Explained

    Understanding commercial property valuation terms is essential for any NZ property owner, investor or tenant. Most commercial valuation reports are written in professional language that assumes the reader already understands valuation and leasing concepts.

    This guide uses a generic leased office floor in a city building as an example to show what those terms actually mean in practice.

    1. Gross Rent, Outgoings and Net Income — Key Commercial Property Valuation Terms

    Valuers always work back to net income – what the building actually earns after costs. Whether a lease is gross (landlord pays outgoings) or net (tenant pays outgoings on top), the valuer converts everything back to a net figure so they can compare apples with apples across properties.

    2. Market Value

    Market value is a professional estimate of a fair sale price on a given date. It assumes a normal marketing campaign, a willing buyer and seller, and that neither is under pressure to do a deal.

    3. Net Income and Initial Yield

    Initial yield is the return today based on the current rent and costs. If you paid $1.8m for a building earning $140,000 net, you’d be getting about 7.8% before interest and tax.

    4. Equivalent Yield

    Initial yield uses the income actually being received today. Equivalent yield is the yield an investor would require today if they looked through any unusual current income and priced the property off a normal, sustainable income profile.

    5. Capitalisation Rate (Cap Rate)

    The cap rate is the return investors expect for that type of property and risk profile. A lower cap rate means buyers accept a lower return and pay more. A higher cap rate means buyers demand a higher return and pay less. It bakes in tenant covenant, lease profile, building quality, location, and rental position.

    6. Discount Rate and DCF

    In a Discounted Cashflow (DCF), the discount rate is the target annual return an investor requires. The valuer forecasts 10 years of rent, vacancies, outgoings and capital expenditure, assumes a sale at the end, and discounts those future cashflows back to today.

    7. WALT – Weighted Average Lease Term

    WALT tells you on average how long your income is locked in before you have to re-let or renegotiate. Short WALT means more leasing risk. Long WALT means more comfort for banks and buyers.

    8. Tenure – Freehold vs Leasehold

    Freehold means you own land and building with no ground rent. Leasehold means you pay ground rent to a separate landowner. Leasehold often trades on a higher yield and lower value per sqm because buyers take on future ground rent and review risk.

    9. Cap Rate, Yield, ROI and Terminal Yield

    Yield is a snapshot return from the property. Cap rate is the market’s required return used to set value. ROI factors in your total deal including capital gain and debt. Terminal yield is the exit yield at sale in the DCF – usually set slightly higher than today’s cap rate to reflect increased risk at exit.

    10. Valuation Date and Assumptions

    How to Use Your Valuation

    Every valuation is a snapshot in time based on a set of assumptions. Think of it like a blood test – accurate for that day, based on the information provided. If the market, lease profile, or building condition changes, the number can move.

    Instead of just looking at the dollar number on page one, use the report to understand your income structure, what yields and cap rates say about market risk, how long your income is secure (WALT), and what assumptions the valuer has made that could move the number.

    If you’ve received a valuation and need a second opinion, Klug can review the report and provide a plain-English summary of what’s solid, what’s risky, and where you have levers to improve value.

  • Beyond the Rent: A Key to Smarter Lease Negotiations

    Beyond the Rent: A Key to Smarter Lease Negotiations

    Successful commercial lease negotiation in NZ requires looking well beyond the headline rental figure. Smart negotiators understand that the terms surrounding the rent often have a greater impact on total occupancy cost and long-term flexibility than the rate itself.

    At Klug, we help institutional clients and occupiers with commercial lease negotiation in NZ by optimising their lease agreements and considering the full picture — not just what the rent looks like on day one, but how the lease performs over its full term.

    Key Areas in Commercial Lease Negotiation

    Exit strategies — Early termination rights, subletting provisions, and assignment flexibility give tenants options if circumstances change. Without these, you can be locked into space that no longer fits your business.

    Fitout contributions and rent-free periods — These reduce your effective occupancy cost in the early years and can significantly shift the economics of a deal. A slightly higher face rent with a generous incentive package can be better value than a lower headline rent with nothing attached.

    Rent review mechanisms — How and when the rent is reviewed matters as much as the starting figure. Fixed increases, CPI-linked reviews, and market reviews each carry different risk profiles for landlord and tenant. Understanding how the Property Law Act 2007 applies to rent review disputes is essential.

    Outgoings and operational costs — Understanding what you are liable for beyond the base rent — building insurance, rates, body corporate levies, management fees — is critical. These can represent 30 to 50 percent of your total occupancy cost.

    Make-good obligations — What condition do you need to return the premises in at the end of the lease? Poorly drafted make-good clauses can result in significant unexpected costs at expiry.

    Why This Matters

    A lease that looks good on the rent line can become problematic when other terms create hidden costs or operational constraints. With over 20 years of commercial property experience, Klug negotiates comprehensive agreements that protect your interests and provide long-term flexibility.

    Whether you are acquiring space, renewing an existing lease, or restructuring your portfolio, our expertise in commercial lease negotiation ensures you get more than just a good rent rate — you get a strategic asset. Explore our advisory services or contact us to discuss your next lease.