A building needs to be maintained, insured, and compliant, and that costs money. Those short-term expenses, like common maintenance fees, insurance coverage, and property taxes, are required to “run” the building.
Operating expenses – also known as additional rent and CAM (common area maintenance) – are normal parts of doing business. They affect the costs for the tenant and the net operating income (NOI) for the landlord. However, each party views the costs from a different perspective. As a broker, I often explain how and why these expenses are important to consider for investment and lease deals.
Here are my five things you should be aware of when thinking about operating expenses:
1. Most CRE lease structures are triple net (NNN). That means each tenant typically pays their pro rata share of the building’s operating expenses. If you are the sole tenant, you pay 100% of those expenses.
2. Both tenants and landlords need to understand how operating expenses are calculated. Otherwise, tenants may risk paying more than budgeted, and landlords risk a shortfall in covering required operational costs.
3. Landlords work to keep those expenses down for tenants (without risking the safety, compliancy, and lifespan of the building) to remain competitive in the marketplace. For example, they seek out the most cost-effective maintenance plan, snow removal, or lawn care service. They want to attract quality tenants who also work to keep costs down.
4. Sometimes to keep expenses down, it makes sense for tenants to handle small maintenance jobs on their own. For example, do you have someone on staff that could shovel that sidewalk instead of paying an additional snow removal cost? Does someone have a can of WD-40 to spray in a stuck lock? Depending on the type of building and maintenance staffing situation, it may make sense. Tenants in an office versus industrial buildings have different definitions and expectations of additional rent or CAM.
5. Provisions can be negotiated. However, certain expenses should not be included in operating expenses. Often marketing costs, leasing commissions, tenant improvement allowances, etc., are not included. Work with a broker that clearly understand property management. They are expert negotiators and know the CRE business from both sides.
Commercial leases can be very complex and both parties have a lot on the line in regards to operating expenses. Whether a tenant or a landlord, brokers and lawyers can help you understand the particulars of your lease and how they may impact your business moving forward. I’m here to help if you have any questions (612-788-1552 or jeff@CEGspaces.com).
Jeff Salzbrun is the owner and broker of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in thousands of sale and lease transactions, ranging from single offices to 250,000+ square foot buildings. At CEG, we get your deal done. We know space, and we know the CRE business.
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