Setting the Service Charge on a 24-Unit Building: A Worked Example

An illustrative SAR build-up of the annual operating budget for a Saudi residential building, converted to a monthly charge per unit and tested against collection losses.

A service charge is an operating budget divided by the units that benefit from it, adjusted for the reality that not everyone pays on time. This worked example builds the annual cost of running a 24-unit residential building, converts it to a monthly figure per apartment, tests whether the reserve contribution is adequate and compares the result with what the local market will accept. All figures are illustrative assumptions.

The situation

You own a completed 24-unit residential building in a Saudi city, let on individual tenancies, and you are setting the operating budget and the charge that will fund it for the coming year. Each apartment has 100 square metres of saleable area, so the building has 2,400 square metres of apartments plus common areas.

Assumptions (illustrative)

• Annual costs assumed as follows: cleaning SAR 72,000, security SAR 96,000, lift maintenance SAR 24,000, air conditioning and plant maintenance SAR 36,000.
• Common electricity and water assumed at SAR 60,000, pumps, generator and fire system servicing at SAR 18,000, landscaping and pest control at SAR 12,000.
• Building insurance assumed at SAR 20,000 and the management fee attributable to common services at SAR 40,000.
• A reserve contribution for future replacements assumed at SAR 60,000 per year.
• Collection losses assumed at 5 per cent of amounts billed.
• Comparable buildings in the district are understood to charge roughly SAR 1,350 per apartment per month.

Step 1: Total the recurring operating cost

Add the items: 72,000 plus 96,000 plus 24,000 plus 36,000 plus 60,000 plus 18,000 plus 12,000 plus 20,000 plus 40,000 plus 60,000, which totals SAR 438,000 per year.

This is the real cost of the building working properly, including money set aside for replacements. A budget that omits the reserve looks cheaper and simply moves the cost to a future year.

Step 2: Convert the budget into a charge per unit

SAR 438,000 divided by 24 apartments is SAR 18,250 per apartment per year, which is SAR 1,520.83 per month, or about SAR 1,521. On area, 438,000 divided by 2,400 square metres is SAR 182.50 per square metre per year.

Expressing the charge per unit and per square metre lets you compare with other buildings and explain the figure to tenants or buyers without argument about what is included.

Step 3: Test whether the reserve contribution is adequate

Assume replacement costs and lives of: lift SAR 250,000 over 20 years, which is 12,500 per year; chillers SAR 300,000 over 15 years, which is 20,000; facade and external paint SAR 180,000 over 10 years, which is 18,000; pumps and generator SAR 120,000 over 12 years, which is 10,000. The total requirement is SAR 60,500 per year against a contribution of SAR 60,000.

The reserve is close to adequate on these assumptions, with a small shortfall of SAR 500 a year. Buildings that set a reserve arbitrarily usually discover a much larger gap when the first major item fails.

Step 4: Add the collection loss to the billed amount

To collect SAR 438,000 while losing 5 per cent, the amount billed must be 438,000 divided by 0.95, which is about SAR 461,000. Per apartment that is 461,000 divided by 24, which is about SAR 19,208 per year, or SAR 1,601 per month.

Budgeting only the cost guarantees a deficit, because some charges are always late or unrecovered. Either build the loss into the billed figure or fund it yourself, but decide which rather than discovering it.

Step 5: Compare with what the market will accept

The required SAR 1,601 per month exceeds the district norm of about SAR 1,350 by SAR 251 per apartment per month. Across 24 apartments and twelve months that is 251 multiplied by 24 multiplied by 12, which is about SAR 72,000 per year.

If tenants will not accept the required charge, the SAR 72,000 gap is absorbed by you out of rent. That is a genuine reduction in net income and it belongs in your appraisal, not in a footnote.

Step 6: Decide what to change rather than what to hope

Reducing security from full cover to daytime cover saves SAR 36,000 per year, halving the gap to about SAR 36,000. Alternatively, the gap can be recovered through rent, which on 24 units at full occupancy is about SAR 125 per unit per month.

The choice is explicit: reduce the service, absorb the cost, or price it into rent. Presented as three numbers, it is a decision. Left implicit, it becomes a slow erosion of net income.

What changes the answer

• A 20 per cent rise in energy prices would add about SAR 12,000 to common electricity and water, roughly 2.7 per cent of the budget.
• If collection losses reach 10 per cent, the billed amount must rise to about SAR 487,000 to fund the same spending.
• If the lift needs replacement earlier than assumed, the reserve requirement rises sharply and a special contribution may be needed.
• At 85 per cent occupancy, the unrecovered share of the charge on empty units falls on the owner, not on the tenants.
• Deferring planned maintenance reduces this year budget and typically raises the eventual replacement cost.

What the numbers tell you

• Build the budget from items and then divide, rather than picking a charge and hoping it covers the building.
• Include a reserve contribution derived from replacement costs and lives, not from a round number.
• Bill for the collection loss or fund it deliberately, because ignoring it produces an annual deficit.
• Compare the required charge with the local norm early, because the gap is a real cost to the owner.
• State the charge per unit and per square metre so it can be explained and defended to tenants and buyers.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.