A Primer on Commercial Operating Expenses

In this article, we explore:

• What commercial operating expenses are and how they impact your lease
• Differences in how operating expenses are handled in full service vs. triple net (NNN) leases
• Common items included in operating expenses, such as taxes, insurance, and maintenance costs
• How operating expenses are calculated and adjusted annually
• The importance of understanding operating expenses when securing the best lease for your business

If you are leasing any type of commercial space, you are most likely paying operating expenses, in addition to your monthly rent. As the name suggests, operating expenses are any costs associated with operating the leased property.

Landlords pass these costs to their tenants. If the building is occupied by multiple tenants, the operating expenses paid by each tenant are based on their proportionate share. This proportionate share is calculated by dividing the square footage of each space by the total square footage of the building.

Operating Expenses in Full Service vs. Triple Net Leases

Operating expenses are charged differently depending on whether you have a full service lease or a triple net lease.

With full service leases, the operating expenses rate is already built in the full service lease rate you are paying for the space. These types of leases, however, typically specify an operating expense stop. This is the maximum dollar amount from the full service rate that the landlord is going to use to cover operating expenses. If the operating expenses exceed this amount, the landlord will send a bill for the overages at the end of the year. Alternatively, if the operating expenses for the year were lower, a credit will be issued towards next year’s expenses.

In triple net (NNN) leases, any operating costs are charged in addition to the base rental rate. Landlords send monthly bills, which are due with the monthly rent payment. Just like with full service leases, the landlord would reconcile the actual expenses at the end of the year, and bill or issue credit to each tenant accordingly.

It is worth noting that, similarly to rental rates, operating expenses for triple net leases and operating expense stops in full service leases are quoted as dollars per square foot per year, for example $5.50/sq. ft. a year. This rate is typically based on the operating expenses for the previous year, and, as we mentioned earlier, is adjusted after reconciliation of actual expenses at the end of the year.

Sample Operating Expense Items

While the list of operating expenses charged to tenants would differ slightly from one property to the next, most leases cover the following items:

• Real estate taxes

• Property insurance premiums

• Third-party property management and accounting fees

• Maintenance staff wages and benefits

• Administrative expenses and charges

• Utilities, including electricity, gas, fuel, water and sewer

• Garbage and recycling pickup

• Service contracts and on-demand maintenance for elevators, HVAC, and other building systems

• Landscaping and parking lot maintenance

• Janitorial and other cleaning services

• Security system costs and security staff wages

• Painting, roof repairs, and other general maintenance

• Any tools, supplies, and equipment used in maintaining the property

• Amortized amounts for capital expenditures

Operating expenses are only one of the many criteria you need to consider when looking for the perfect location for your business. If you need further help understanding these charges, or any other aspect of commercial real estate leasing, please contact our experienced team of tenant representatives, who can guide you throughout the entire leasing process, from requirements assessment, to move-in and space disposition.

And operating expenses are only the tip of the iceberg when it comes to securing the best leases in a post-apocalyptic office market. From understanding evolving needs to leveraging strategic negotiation tactics, mastering this landscape requires a comprehensive approach. In "Surviving the Office Apocalypse," delve into practical strategies and insights to thrive in the new era of office real estate. Secure your copy today in the exclusive first release.