What Are Commercial Real Estate Operating Expenses?

Whether you are purchasing a piece of property outright, investing in a building, or leasing a commercial space for your own business, it’s important to understand commercial real estate operating expenses, since they impact both tenants and net operating income (NOI) for the owner.

The smart property manager considers their expenditures when budgeting and knows how to minimize these business costs and negotiate favorable contracts, including monitoring how much is being spent and adjusting rates as necessary. For the inexperienced owner, not knowing how to calculate or structure these into a contract can be detrimental to their financial goals.

Definition Of Commercial Real Estate Operating Expenses

Often abbreviated to opex, these are the charges associated with maintaining and running a commercial property, such as an office building, retail space, or warehouse. They are part of the overhead and can be as important as the mortgage.

Depending on the building’s lease structure, these expenditures may be a component of the gross rent or be in addition to the base rent. In multi-resident buildings, each tenant is responsible for their share of management costs, which depends on the rentable square footage compared to the total rentable square footage of the building.

What Is Included In Operating Expenses?

It should come as no surprise that the running costs of a building depend on the class of commercial property. An office or retail space will have different expenditures than a multi-family building. Many of the costs passed to renters are shared between lease holders and the owner in a commercial property. These include:

What Is Not Included?

There are a few major charges not included in a property’s costs, although it’s important to note they may still be part of an owner’s responsibility. These include:

  • Advertising and marketing costs, which are usually the responsibility of the owner or management company
  • Fees associated with refinancing the property
  • Consultant fees and market study fees
  • Tenant improvements, which are usually negotiated individually with each resident and are not always the owner’s financial responsibility
  • Capital improvements and structural repairs, which technically fall under CAM, but are often lumped into their own category because they typically require prior approval from residents since they may be major additional charges

Operating Expenses And NOI

The formula used to determine NOI is meant to deduct the costs from gross operating income. Any landlord looking to maximize profits would benefit from minimizing expenditures or passing them along to residents. Another important formula to consider when evaluating properties is the operating expense ratio (OER). This is the costs to operate the property, not including depreciation, divided by gross operating income. A lower OER is better, as it usually indicates minimized expenditures and higher profit margins

Who Pays Commercial Real Estate Operating Expenses?

The residents of a building generally split the financial burden of operating costs, paying based on the percentage determined by the rentable square footage on their lease. The owner, on the other hand, is responsible for the expenditures of any vacant space. This is why it’s usually to an owner’s benefit to keep as much of the building rented out as possible.

The way payments are structured depends on the kind of lease a tenant has, as well as any specifications they and owner agree to in the contract. Triple net leases cover base rent only, and any expenditures are assessed pro rata on top of the set rate. Full-service gross lease structures include the building costs in the rate, while a modified gross rent has different inclusions but typically includes some operating expenses in the base rate.

When Tenants Try To Negotiate

Anyone considering becoming a tenant will often read the operating expense clause in their lease carefully and come back with items they wish to exclude or limit. This could look like negotiating for a higher expense stop, wanting utilities measured or metered rather than automatically assessed, or asking for major expenditures to require their prior approval.

Tenants commonly ask for certain limitations and built-in safety parameters to ensure their charges don’t escalate beyond a reasonable amount. These include expense stops and operating expense caps.

In a gross lease, an expense stop is the maximum annual threshold for building management expenditures that owners are responsible to pay. Though gross leases include these, stops put a limit on what the owner must pay. A tenant in a gross lease may ask for a higher stop if they think the owner should be responsible for more of the management costs. This stop is also used as a numeric reference point on a lease for reasonable charges in the first year of that lease term. Meanwhile, a tenant in a net lease might ask for a lower stop in exchange for the ability to review the landlord’s list of expenditures.

The operating expense cap is a cap on annual expenditures charged to a tenant or a cap on expenditure increases. It is often requested for CAM fees, since owners have the responsibility to hire vendors and source supplies that are billed under CAM charges.

These are just as important as rent. Knowing the price of running a building may help accurately calculate its income potential. No matter the lease structure, operating expenses account for a significant portion of what tenants and owners worry about: the cost of running their business.


What is included in operating expenses?

Typically, costs such as utilities, repairs, maintenance, exterior work, insurance, management, and property taxes all factor into the overall operating expenses.

What is not included in operating expenses?

Capital expenses, debt service, commercial property marketing costs, leasing commissions, tenant improvement allowances, and capital reserves are typically not included. This may vary from property to property.

How do you calculate operating expenses?

In commercial real estate, the operating expense ratio is a measurement of the cost to operate a piece of property compared to the income that property brings to the investor. It can easily be calculated by dividing the property’s operating expenses (not including depreciation) by its gross operating income.

What is the difference between direct expenses and operating expenses?

Investors may often confuse operating expenses with direct costs. Both are expenses incurred from operating your business or property, but the operating expenses are not directly tied to production. This only directly affects business owners, rather than investors who own a property, however.

Invest With Avistone

If you’re looking to begin investing in commercial real estate, we can help you get started. Avistone is a rapidly growing commercial real estate investment firm focusing on the acquisition and management of multi-tenant flex/industrial properties and the acquisition and asset management of hotel properties nationwide.

Our firm offers accredited investors the opportunity to purchase equity shares with the potential to receive in-place cash flow from operations and capital appreciation upon sale. In order to provide the best possible outcomes for our investors, we acquire properties in markets with historically high occupancy rates, proven demand, and strong economic indicators.

We also focus on asset and property management to provide superior service to tenants and guests as a key to the success of our investment strategy. Since our founding in 2013, we have acquired 26 properties with more than 4 million square feet of space. Contact us to learn more about our current offerings.

© 2024 Avistone, LLC. All rights reserved.

*IMPORTANT DISCLOSURES: This communication is intended exclusively for the private and confidential use of accredited investors. It is transmitted by the sponsor of the investment opportunity, Avistone, LLC, or one of its affiliates (referred to as "Avistone" or "Sponsor") and is provided solely for informational purposes. All information and opinions contained herein, including assumptions and projections (collectively referred to as "Projections"), are furnished by the Sponsor. The Sponsor and its affiliates make no representations or warranties regarding the accuracy of such information and disclaim any liability in this regard. None of the content in this communication is intended to create a binding obligation on the part of the Sponsor or its affiliates. This communication is fully qualified by reference to the comprehensive information regarding the offering set forth in the Sponsor's offering documents, including any private placement memorandum, operating agreement, and subscription agreement (collectively referred to as "Offering Documents"), which should be carefully reviewed before making any investment.

The Projections provided by the Sponsor, including target IRR, target cash-on-cash, and target equity multiple (referred to as "Targets"), are hypothetical and are not based on actual investment results. They are presented solely to provide insight into the Sponsor's investment objectives, outline anticipated risk and reward characteristics, and establish a benchmark for future evaluation of the Sponsor's performance. The Sponsor's Projections and Targets do not constitute predictions, projections, or guarantees of future performance. There is no assurance that the Sponsor will achieve these Projections or Targets. Forward-looking statements, including the Sponsor's Projections and Targets, inherently involve a variety of risks and uncertainties, and actual results may substantially and materially vary from those anticipated. Refer to the applicable Offering Documents for disclosures concerning forward-looking statements. Projections and Targets, including forward-looking statements, should not be the primary basis for an investment decision. Avistone and its affiliates do not provide any assurance regarding returns, or the accuracy or reasonableness of the Projections or Targets provided by the Sponsor. Past performance does not predict future results. The historical performance record of Avistone is not indicative of future outcomes. Third-party audits have not been conducted on the performance of Avistone's prior projects. Differing property offerings and commitment dates for individual property offerings resulted in varying returns for investors.

The metrics of the Full-Cycle Track Record on industrial properties are calculated based on weighted averages that treat investment dollars equally and are computed by aggregating the outcomes of all Avistone full-cycle industrial property investments, with weights corresponding to the respective capitalization amounts for each Full Cycle Investment. This real estate investment is speculative and involves substantial risk. There is a potential for a partial or complete loss of principal investment and should only be undertaken if you are prepared to bear the consequences of such a loss. Thoroughly review all of the Sponsor's Offering Documents, including any "Risk Factors" therein. For additional information concerning risks and disclosures, please visit https://www.avistone.com. None of the content in this communication should be considered investment advice, whether regarding a specific security or an overall investment strategy. Reproduction or distribution of this message to any individual or entity outside the recipient's organization is prohibited without the express consent of Avistone.