Operating Expenses in Commercial Real Estate

Operating expenses, also commonly referred to as CAM charges (common area maintenance), are the second largest expense after rent associated with leasing retail, office or industrial space. A thorough understanding of what these charges entail prior to signing a lease is very important.

How are Operating Expenses Quoted in Commercial Real Estate?

Operating expenses, just like base rent, are quoted per square foot per year. This means that if your operating expenses are $2.10 per square foot, and your leased space is 2,000 square feet, the total annual amount due will be $4,200 (the result of multiplying $2.10 by 2,000 square feet). This annual amount divided by 12 will give us the monthly operating expenses sum - $350 in our example.

Do Operating Expenses Increase During the Lease Term?

Again, just like base rent, operating expenses may change from year to year. The difference is that unlike rent, which normally increases by a certain percentage each year (for example by 3%), operating expenses are based on landlord's operating budget and thus may increase or decrease from year to year. In addition, because they are based on a budget, they are only an estimate. At the end of the year, landlord reconciles its actual operating expenses for the year, and depending on whether there was an overage or a deficit, landlord will credit tenant's balance or send a bill for the difference.

How are Operating Expenses Split Between Multiple Tenants in a Commercial Property?

In multi-tenant properties, each tenant is only responsible for its proportionate share of the entire property's operating expenses. The proportionate share of each tenant is calculated by dividing the square footage of the tenant's leased space by the total square footage of the property.

What may be included in Operating Expenses?

• real estate taxes assessed to the property;
• property insurance premiums;
• utilities such as water and sewer, electricity and fuel used in HVAC systems;
• maintenance work and repairs such as painting, window cleaning, and janitorial services;
• landscape and maintenance of driveways, walkways, and parking areas;
• garbage and recycling pickup;
• property management and accounting fees paid to a third party management company;
• maintenance and service contracts for mechanical, electrical, HVAC and elevators;
• wages and benefits for the maintenance staff of the property;
• administrative expenses and charges;
• costs of providing security for the property, such as security systems and security staff;
• tools, equipment and supplies;
• amortized amounts for capital expenditures;

This list is by no means all-inclusive. Keep in mind that each property's maintenance requirements differ and so will its CAM charges. You should discuss any items you don't understand with your landlord or property manager.