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The Role of property management in real estate growth

In the past decade the skylines of Kenya’s cities and towns have been filled with magnificent skyscrapers.

They are statements of purpose, commercial success and faith in the future. Every day we see new ones and that counts for something in the form of income generation and employment for more than 70 per cent unemployed youth. What is not so visible is the upkeep of these structures over the short and long term. Property management is meant to capture both the value of the structure in terms of longevity of its technical life, as well as a reliable regular revenue stream.

Maintenance can be done in different stages. Reginald Lee defined those stages as follows:

  • Planning and design stage – which should be based on intended use and be as maintenance free as possible. In this stage a lot of money can be saved with the proper plan and design. For this reason, the building manager and maintenance personnel should be consulted during the early stages of the building design.
  • Construction stage – in order to have maintenance during the building’s life, construction must be done with the highest quality of workmanship. As a result, expert contractors and sub-contractors should be selected for the project.
  • Maintenance stage – which is performed after the building has been constructed and occupied. It is sometimes looked at casually, much to the detriment of the investment property itself.

During an economic downturn the tendency is to reduce the financing of maintenance, yet any reduction in resources applied to building maintenance will have a visible effect on the economy. There are buildings that although generating income have little of it ploughed back to meet the required standard in terms of conditions of use and the law. There is a mismatch between the development cost and what is spent to maintain the assets. Many building owners regard maintenance as a drain on their legitimate income and mistakenly claw back budgets set aside for upkeep. A rapid growth in the building and housing stock clearly appears in the Gross Domestic Product as a part of the country’s development. More houses are being constructed. As a result, more maintenance work is required in order to cope with this type of construction.

The objectives of building maintenance are therefore:

  1. To ensure that buildings and their associated services are in a safe condition.
  2. To ensure that the buildings are fit for use and purpose.
  3. The condition of the building meets all statutory requirements.
  4. To maintain the value of the physical assets of the building stock.
  5. To carry out the work necessary to maintain the quality of the building.

Current building maintenance strategies are most likely to be budget driven. This means that maintenance is not based on actual need, but is dictated by financial priorities decided at the time or during the previous year. Although theoretically the budget should be built up as a result of estimated needs, it is almost invariably based on previous year’s figures.

Proper maintenance leads to lower depreciation costs (due to longer economic life) and consequently leads to higher profitability. At the national level, proper maintenance leads to lower expenditures on replacement, thus, allowing more expenditure on new productive investment properties.

tax waiver

Rental income tax waiver a juicy deal for house owners

Rental income tax waiver a juicy deal for house owners

The wave of economic difficulties facing many governments throughout the world has seen an increasing number invest huge amounts of resources and effort on tax compliance and information sharing.

Many countries are offering tax amnesty to citizens who disclose unpaid taxes on investments as a means of getting them into the tax net.

Normally, tax amnesties allow taxpayers to come clean on potentially dubious tax matters. In return taxpayers receive a reduction in the harsh penalties that would have applied had the mischief been discovered during an investigation by the authorities. Harsh penalties include late payment and late filing and in some cases, criminal conviction.

Locally, the Kenya Revenue Authority (KRA) has introduced a rental income amnesty for landlords who have not been paying taxes on the rental income.

The rental income tax amnesty came after the KRA realized that landlords were not willing to comply with rental income tax due to the fear of being charged huge backlog taxes after years of non-compliance. The amnesty is aimed at bringing on board approximately 20,000 new landlords expected to pay in at least Sh3 billion in revenue.

The landlords appealed to the government to grant them an amnesty on the back taxes and to simplify the tax in a bid to reduce the cost of compliance.

The government heeded to their pleas and granted an amnesty that runs from  July 1, 2015 to  June 30, 2016. The tax rate was also reduced to 10 per cent of gross rent for landlords earning Sh10 million and below effective January 1, 2016.

The tax amnesty targets individual landlords, including tenants who sublet their servant’s quarters, deceased landlords whose compliance duty now lies with estate administrators and legal representatives as well as Kenyans living in the diaspora who earn rental income in Kenya.

The situation is quite different for individuals whose properties are registered under a company. They are eligible for the amnesty as it only applies to individuals.

Individual landlords who have received KRA notice asking them to pay taxes are also ineligible for the amnesty.

Why take up the amnesty?

For those who will heed the call and apply for the amnesty, there is a whole range of benefits that will accrue. Individuals, who take up the tax amnesty will get 100 per cent amnesty on principal tax for 2013 and prior years, effectively pay in the principal tax only for 2014 and 2015 with a 100 per cent waiver on   interest and penalties.

Secondly, effective January 1, 2016 landlords will enjoy a simplified and reduced tax rate of 10 per cent of gross rental income.

Thirdly, once a tax payer is compliant she is issued with a Tax Amnesty Certificate that ensures they will not be subjected to further compliance checks for the years 2013 and prior, 2014 and 2015.

Where expenditure records cannot be supported or are unavailable, landlords will enjoy a deduction of 40 per cent of the gross rental income as expenditure and in case the landlord is unable to pay the tax in lump sum they will be allowed to pay in installments till end of June 2016.

Cheaper to comply

The danger is that in the event a landlord fails to fully disclose tax due or simply evades paying the tax and KRA has evidence of such, the law empowers the taxman to take punitive measure, including determining tax due for seven years, issuing agency notices to banks and third parties to recover tax (basically the rent collected from the landlord’s property is channeled to KRA by tenants and bank), placing of caveats and charges at the Ministry of Land, which means the property owner cannot sell it and in worst case scenarios, auctioning the property to recover the taxes.

In case you thought that you can hide from the tax man, think twice. Through collaboration with government and private sector institutions, the KRA is able to get every individual’s detailed financial data from banks, mobile money transfers and even tell which property one has bought and where one lives.

It is basically easier and cheaper to comply with the tax than evade.