On Operating Expenses
Many business owners and corporate decision makers that have signed leases or purchased buildings are well aware of Operating Expense pass throughs. For those needing a refresher...
Most commercial leases are structured as “Triple Net Leases” (also commonly abbreviated as NNN.)
The tenant pays the landlord a base rental rate, which varies according to the asset class, location, and market conditions.
In addition to the base rent, the tenant will be responsible for reimbursing the landlord for three major line items—Property Taxes, Building Insurance, and Common Area Maintenance.
These 3 items are known as “Operating Expenses” or OP EX.
Property Taxes, or real estate taxes, are generally the largest component of OP EX. These are generally readily available to see on an internet search of Public Records, by going to the County Property Tax Appraiser where the building is located. The landlord pays the tax collector; the tenant reimburses the landlord for this payment.
Building Insurance is the commercial general liability and casualty coverage that insures the building. This cost can vary considerably based on asset class and location, and the size and characteristics of the building. It will also be influenced by whether or not the building owner is an institutional owner, and can defray insurance costs over a large group of assets. Note that Building Insurance is not the same as interior contents insurance on furnishings, equipment, and inventory.
Property Taxes and Building Insurance are generally known as “Uncontrollable” Operating Expenses, meaning that the landlord has little ability to influence the costs. They are what they are. The landlord pays them; the tenants must reimburse the landlord their pro-rata share. If the landlord feels that it has been taxed unfairly, it can petition the local government for an adjustment.
The final component of OP EX is Common Area Maintenance, also known as CAM charges. This would cover a myriad of line items including utilities, landscaping, janitorial services, irrigation, security, parking lot maintenance, property management fees, and reserves for replacement. These expenses are somewhat controllable by the landlord, and therefore, the tenant (when represented properly) can sometimes secure CAPS on the annual percentage increase by which these expenses can be increased.
Operating Expenses can be a SIGNIFICANT component of a tenant’s facility costs, ranging from 20% to 40% of the base rent. If the tenant is not accurately advised as to its’ exposure to these pass throughs, it can cause unexpected financial distress years down the road.
Our company advises end users in lease and purchase negotiations for office and warehouse space, nationwide.
Our role is to protect our clients’ interest to ensure that the Operating Expenses are fair, and that there are no surprises.
We would be glad to answer any questions you may have on this, or any other subject related to your facility costs.