Commercial letting: 18.42% on paper, 5.26% in fact

“Fourteen units, not one of them empty, and I hold the rate at 285 ₴ a square metre. On the price list the complex yields 18.42% on the 52 million invested. And the first time I worked out what actually stayed with me over the year, it came to 5.26%” — that is how Andrii Voloshyn, owner of an office-and-warehouse complex in Lviv, opened the conversation.

If you let commercial space, you have already asked yourself this. The tenants are in place, the payments arrive, the rate is not the lowest in town. And the yield you bought the asset for has gone somewhere — and not a single line in the report shows where.

The reason is usually neither the utilities nor the tax. A unit brings in money only while somebody is sitting in it, and it costs money always. The most expensive stretch in the life of a complex is the one where one tenant has already moved out and the next has not yet signed.

We break the complex down to a single tenant changeover — and get to why the lease term matters more to the yield than the rate does.

Andrii's road: from two warehouses to a complex of 2 800 m²

Andrii started with two storage boxes he converted out of a former motor depot. He let them himself and kept the maths on a single sheet: the rate is this much, the utilities that much, the difference is mine.

In twelve years that became a complex of 2 800 m²: 14 units, its own manager, an accountant and a loan. That is when the feel for the numbers went — there were seven times more units, and the profit showed no such increase.

“When I had two boxes, I knew everything about each of them: who was sitting there, what date the rent was paid up to, when the lease ran out. Now there are fourteen units, and I cannot tell you which of them will be standing empty next year.”

Why “18.42% off the price list” is not the yield of the complex

The arithmetic Andrii described the asset with is honest at every step. 2 800 m² multiplied by 285 ₴ is 798 000 ₴ a month and 9 576 000 ₴ a year. Divided by the 52 000 000 ₴ the asset cost, that comes to 18.42%.

Only those 18.42% describe the price list, not the complex. Two conditions are built into them that never hold at the same time in real estate: every unit is let at the full rate, and not one of them stands empty for a single day. The real yield of that same asset is 5.26%, and what follows shows what the difference is made of.

Let us agree straight away: 18.42% is the gross figure off the price list, the net one is 5.26%. They are easy to mix up, because an owner is used to calling the first one his yield while living off the second.

Life before the lease term became a number

The bookkeeping Andrii lived with through those years is recognisable to any owner of commercial property who has grown out of a couple of boxes.

• The yield was worked out off the price list. 2 800 m² multiplied by the rate — a figure that suited everybody.
• An empty unit had no price. You could see that it stood empty, and you could not see how many hryvnia that came to.
• The lease term counted as a legal detail. The lawyer knew it, and in the financial report it did not appear at all.
• The fit-out for a tenant went through as “current works”. On one line together with changing the lamps in the corridor.
• The broker's commission was written off as unavoidable. The payment was a one-off, so it never affected a single decision.
• Utilities on empty units were never separated out. They sat inside the total for the whole complex.

There is not a single complaint about the property itself in that list: the building is sound, the manager is in place, the tenants pay. All six are bookkeeping errors, and errors like that are visible neither on site nor in the bank statement.

The basic unit: one tenant changeover

The first thing Andrii did was work out what one moved-out-moved-in cycle costs in a single unit. The average unit in the complex is 200 m², and at a rate of 285 ₴ it brings in 57 000 ₴ a month. Everything after that is measured in that sum.

Component of one tenant changeover	₴	Cash out or revenue forgone
Vacancy of 2.5 months (2.5 × 57 000 ₴)	142 500	revenue forgone
Fit-out for the new tenant (200 m² × 420 ₴)	84 000	cash out
Broker's commission — one month of rent	57 000	cash out
Utilities in an empty unit (2.5 × 200 × 38 ₴)	19 000	cash out
One changeover in total	302 500	—

302 500 ₴ in one go. Part of that never even leaves the account: it is rent the unit was meant to bring in and did not. The rest does leave — as the fit-out, the commission and the bills for a space with nobody in it.

Why 57 000 ₴ stands in the table twice

It is not a slip and not a duplicate. 57 000 ₴ is the monthly rent of the average unit, and it is also the broker's commission, because a broker in this market takes exactly one month. The numbers are identical on purpose: that is how the market agreed to measure the middleman's work — in the same unit the owner's income is measured in.

Every changeover hands the broker one month — and you will no more see that month in your profit than you will see the two and a half months of vacancy.

A vacancy of 2.5 months is not the owner being lazy

At first Andrii read that line as a reproach to himself: look harder and nothing would stand empty. But a 200 m² space for an office or a warehouse is not taken in a fortnight: the tenant signs off a budget, looks at other buildings, works out the logistics. And once he has signed, he needs a layout that fits his own process — so a fit-out for the new tenant is needed almost every time.

So 2.5 months is not a failure by the manager but a normal term for that kind of floor area. The only thing the owner really influences is how often the cycle repeats.

“For years I heard the same promise from my manager — we will find somebody within a month — and I believed it. Then I pulled up the history on all fourteen units: not one of them was ever let in under two months. Two and a half is not him working badly, that is the price of entry into that kind of floor area.”

A year of the complex: 8 863 500 ₴ of revenue and 6 129 000 ₴ of costs

Now the same asset in real figures. The average lease in the complex runs 2.5 years, and out of fourteen units the tenant changes in 5 every year. So over a year the forgone rent adds up to 712 500 ₴, and the full price-list revenue turns into the actual one: 9 576 000 − 712 500 = 8 863 500 ₴.

Cost item	₴/year
Utilities and upkeep that cannot be recharged	1 044 000
Security and cleaning	612 000
Property tax	468 000
Fit-outs for tenants (5 × 84 000 ₴)	420 000
Commissions to brokers (5 × 57 000 ₴)	285 000
Management: manager, accountant	540 000
Running repairs and depreciation	816 000
Other	264 000
Loan servicing	1 680 000
Total	6 129 000

Subtract: 8 863 500 − 6 129 000 = 2 734 500 ₴ a year. That is everything a complex of 2 800 m² leaves its owner after a year of work.

What in those costs does not wait for a tenant

Mark the lines in that table that disappear when a unit stands empty. There are none. The 468 000 ₴ of tax is charged on square metres, not on tenants. The 1 680 000 ₴ of loan servicing takes no interest in occupancy whatsoever. The 612 000 ₴ of security and cleaning cover the whole complex, and the guard does not go home because one unit is free.

Only two lines depend on tenant changeovers, and both grow along with them: the 420 000 ₴ of fit-outs and the 285 000 ₴ of commissions. The rest accrues just the same, however many units stand locked.

A gross 18.42% against a net 5.26%

Let us put the two numbers side by side. 2 734 500 ₴ on the 52 000 000 ₴ invested is 5.26%. The same property, the same price list, the same rate of 285 ₴ a metre that produced 18.42% in the advertisement.

The difference does not sit in one item: there is the loan, the tax, and the utilities you cannot recharge to a tenant. But the single biggest piece of it is the units standing empty between tenants.

Why 5 changeovers and 5.26% are different fives

There are two fives in this article, and no formula connects them. 5 is the number of tenant changeovers in a year: fourteen units, an average lease of 2.5 years. 5.26% is the net yield on the 52 000 000 ₴ invested. One five is about the calendar of leases, the other about money in the account.

There is a link between them, but a one-way one: the more changeovers, the lower the net yield. You will not derive one from the other by division.

Why 1 512 500 ₴ cannot be subtracted from the profit

Multiply one changeover by how many there are: 5 × 302 500 = 1 512 500 ₴ a year. And here most owners make one and the same mistake — they subtract that number from the 2 734 500 ₴ of profit and get a figure that makes them want to sell the asset.

You cannot count it that way. The 1 512 500 ₴ already sit inside the calculation above, just in two different places and in two different roles. Subtract it again and you will have counted the same money twice.

712 500 ₴ — rent that was never in the revenue

The first part is the vacancies. 5 changeovers at 142 500 ₴ give 712 500 ₴ — the rent those units were meant to bring in over their 2.5 months each and did not. That is precisely the sum we already took off the 9 576 000 ₴ when we turned the price-list revenue into the actual 8 863 500 ₴.

That money was never in the account, so it cannot be lost a second time: it is already accounted for by the revenue being lower than the price-list one.

800 000 ₴ — costs that already stand in the table

The second part is real payments: fit-outs, commissions to brokers and utilities on empty units. 800 000 ₴ a year together, and every one of them is already in the cost table — as the lines of 420 000 ₴, 285 000 ₴ and a share of the utilities.

So the 1 512 500 ₴ is not an invisible loss on top of the report but the price of one phenomenon, gathered from two corners of the report into a single number. The point of working it out is that while this money lies scattered across the lines, it looks like small change. Gathered together, it becomes 55.3% of the complex's annual profit.

“I subtracted the one and a half million from the two seven hundred and just sat there. I thought the asset was loss-making outright. Then they showed me where that money already stands in my own report — and it only felt worse. It turned out it was not hiding, I had simply never added it up.”

55.3% of the profit, settled by the lease term

Vacancy and tenant changeover cost the complex 1 512 500 ₴ a year, that is 55.3% of what the owner takes home. More than half the profit is determined not by the rate and not by negotiations with suppliers, but by how often the nameplates on the doors change.

And this is not a cost item to be cut. The vacancy cannot be removed, the fit-out is needed almost every time, the broker will take his month. All you can reduce is the number of times it all happens.

What a 4-year lease gives instead of 2.5

Andrii worked through a scenario that touches neither the rate nor the costs: the average lease term stretches from 2.5 to 4 years. Nothing else changes.

Metric	Lease of 2.5 years	Lease of 4 years
Tenant changeovers a year	5	3
Cost of changeovers a year	1 512 500 ₴	907 500 ₴
Saving	—	605 000 ₴
The same thing through the rate	—	+18 ₴/m², or +6.3%

Instead of 5 changeovers a year — 3. The same price of one changeover, 302 500 ₴, simply repeats less often: 907 500 ₴ instead of 1 512 500 ₴. The difference is 605 000 ₴ a year, or 22.1% of the complex's annual profit.

Do not mix that number up with its neighbour in the cost table: 612 000 ₴ is security and cleaning for the year, an item that has nothing to do with leases. 605 000 ₴ is the saving from longer leases. The figures look alike and share nothing at all.

The same 605 000 ₴ through the rate: +18 ₴ a metre

Now let us translate the saving into the language an owner is used to thinking about income in — the rate. 605 000 ₴ divided by 2 800 m² multiplied by 12 months comes to 18 ₴ a metre. That is a rate of 303 ₴ instead of 285 ₴, a rise of 6.3%.

Stretching the average lease by a year and a half does exactly the same as raising the rate by 6.3% across the whole complex. The first depends on how the lease is written, the second on whether the market agrees.

Why 18 ₴ a metre and 18.42% must not be confused

The two eighteens stand in different sections and in different units. 18 ₴/m² is the rate increase that the saving from longer leases can be swapped for. 18.42% is the gross yield off the price list, the very one we separated from the net 5.26% at the start.

Neither of those numbers follows from the other. The resemblance is a coincidence, and they are mentioned side by side only so that you do not read 18 ₴ as “eighteen percent”.

Why a tenant will sooner sign a longer term than take +6.3%

The question is which of the two figures is easier to win at the negotiating table. Put yourself in the place of a tenant sitting on 200 m² and paying 57 000 ₴ a month.

He is told the rate is now 303 ₴ instead of 285 ₴. That is a higher payment every month and nothing in return — and he starts looking at other buildings, because 6.3% pays him back even for the move.

A different conversation: the rate stays at 285 ₴, but we sign the lease for 4 years. For the tenant that is a fixed payment over a long term and the certainty that he will not be asked to leave. He does not want to move either: his fit-out, his customers, his logistics are all tied to the address.

“I have haggled twenty times over ten hryvnia in the rate and never once over the term. And the term was handed to me almost for free — nobody had simply ever asked for it.”

What owners do instead of the term

When the yield does not match the expectation, the hand reaches for the familiar levers. They all work, and they all deliver less than the lease term does.

• They raise the rate. The quickest method, and the quickest way to return a unit to the empty state: a tenant who leaves over a rise takes the 302 500 ₴ of one changeover with him.
• They squeeze the suppliers. Security and cleaning come to 612 000 ₴ a year, and what you can negotiate out of that is percentage points, not 605 000 ₴.
• They economise on the fit-out for a tenant. 420 ₴ a metre looks like room for bargaining, right up until the unit stands empty a month longer because nobody wants to take it in that state.
• They drop the broker. One month of rent, 57 000 ₴, looks expensive — until the unit stands empty longer, because now the owner is looking for the tenant himself.

The lease term never appears on that list, because it does not look like a financial decision. It looks like a paragraph the lawyer has been writing the same way for twelve years.

Fit-out for a tenant: 420 ₴ a metre and 420 000 ₴ a year

This line is worth separating out, because 420 appears in it twice. 420 ₴ a square metre is what it costs to prepare a unit for a new tenant: reconfiguring the layout, paint, flooring, wiring for his equipment. On the average unit of 200 m² that is 84 000 ₴ for one changeover.

The 420 000 ₴ in the cost table is the same thing multiplied by the number of changeovers in a year: 5 changeovers at 84 000 ₴. The second number is derived from the first, not a separate item. And it shows that fit-outs for tenants in this complex cost more than the property tax for exactly one reason: the tenants change five times a year.

“I always thought of the fit-out for a tenant as spending on the building. In fact it is spending on the change of tenant: the building is no better for that work, it is done for one specific next occupant.”

What changed when the lease term became a line in the report

Three technical changes, as it turned out. The lease term became a field in the same report as the rate and the floor area. Every tenant changeover started being counted as a separate event with a price of 302 500 ₴. And the utilities on empty units came out of the total into a line of their own.

• The term became a matter for negotiation rather than a formality. Tenants were offered an extension to 4 years at the same rate of 285 ₴ — instead of the rise to 303 ₴ that had been planned.
• The price of one changeover started being said out loud. When the manager sees 302 500 ₴ next to a tenant's name, the conversation about extending does not begin two weeks before the move-out.
• Empty units got an account of their own. The 19 000 ₴ of utilities over 2.5 months of vacancy no longer get lost in the complex's general utility bill.

Neither a new building nor a rise in the price list was required. What was required was working out how many times a year the complex pays 302 500 ₴ to change a nameplate on a door.

The takeaway for business owners. If your business is an asset you let out on long terms, your most expensive metric is not the rate but how often a unit of that asset passes from one client to the next. Work out the full price of one such handover: the income forgone during the vacancy, the preparation for the new client, the middleman's fee and the cost of keeping an empty unit. Then multiply by the number of handovers in a year — and compare that with the profit. Very often it turns out that stretching the average term delivers more than a price rise the market will not grant you anyway. This works the same way in rental property, long-term equipment hire, subscriptions and any business where the client stays for years.

Advice to close with

• Work out the full price of one tenant changeover. Vacancy, fit-out, commission and utilities on the empty unit: for Andrii that is 302 500 ₴ in one go.
• Put the lease term in the same report as the rate and the floor area. As long as it lives only in the lawyer's folder, it affects no financial decision at all.
• Work out how many tenant changeovers your average term produces. 14 units and a lease of 2.5 years mean 5 changeovers every year, however stable the complex may look.
• Do not subtract the cost of vacancy from the profit. Of the 1 512 500 ₴, eight hundred thousand already stands in the costs, and 712 500 ₴ is rent that was never in the revenue.
• Compare a longer term with a rate rise in the same money. 605 000 ₴ of saving is +18 ₴ a metre, that is a rate of 303 ₴ instead of 285 ₴.
• Talk about extending long before the term runs out. A space of 200 m² takes 2.5 months to let, and diligence does not shorten that.
• Count the yield as two numbers and label them both. 18.42% off the price list and 5.26% in fact — the first for the marketing brochure, the second for your decisions.

The money does not vanish — you simply cannot see it

People think about commercial property like this: find the address, assemble the metres, hold the rate. All of that is only the condition of entry. The money is settled by something else — how many years one tenant stays on average, because that is what determines how many times a year you pay the full price of replacing him.

A hole like that does not close by itself and will not show up in the report: the report shows a year, while the lease term stretches over years and is never totalled anywhere. But the moment it becomes a line next to the rate, the main thing is visible — the 18.42% in the brochure does not describe this complex in any way, and the 5.26% consists half of how many units stood empty this year.

How to see this in your own complex

Everything described above rests on a single cut of the data: not the complex as one figure, but the unit as a line, with the rate, the lease term and the months of vacancy standing side by side. While the yield is worked out off the price list, you can see neither what one tenant changeover costs nor the fact that a longer lease beats a higher rate. When the same data is collected automatically, the real percentages become visible, which is exactly why small and medium business owners use Finmap: to see the financial picture instead of assembling it at the end of the month.

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Topic foundation: Management Accounting Explained: What It Is and Why Owners Need It