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For almost anyone who leases a commercial real estate property, rental costs are the biggest concern. While it’s true this is the bulk of your budget, it pays to keep a close eye on your additional operating expenses.

Operating expenses tend to increase year to year as property and utility costs increase. However, many tenants end up overpaying for their commercial space simply because they don’t know any better. This quick guide tells you what should and shouldn’t be included in your commercial real estate operating expenses:

What are commercial real estate operating expenses?

Operating expenses are any costs involved with the day-to-day operation and maintenance of your space – utilities like air conditioning, heating, water, and electricity to property costs like taxes, landscaping, and insurance.

Your operating costs should not include debt service payments, capital reserves for future repairs, marketing costs, or tenant improvement allowances. Tenant improvement allowances allow the tenant to make changes to the commercial space with help from the landlord. The landlord cover a portion of the costs or hires staff to perform the work).

Don’t overpay for your operating expenses. Top 5 things to consider:

To protect your company and your assets, look out for these 5 things. It could help you avoid being among the thousands of tenants overpaying for their operating expenses.

1. The base year

The base year is your first year in your commercial space. It’s one of the most important factors of your operating expenses. Once your base year has been established, it becomes the benchmark for future years’ operating expenses.  

An accurate base year can save you thousands of dollars annually. To make sure yours is fair, ask your landlord for the previous base year for comparison.

2. The percentage of the building leased

Make sure you are only paying for the space you use—especially in a multi-tenant building where multiple companies occupy spaces of varying sizes. If the space you lease has plans to expand, verify that your expenses will only include the square footage of your commercial space.

3. Has the cap rate (if any) been applied?

To avoid paying ever-escalating operating expenses, it is possible to get a cap on increases in operating expenses.  In particular controllable expenses such as building maintenance, property management fees, insurance, landscaping, security, etc can be capped for any given year.  Taxes, being largely uncontrollable expenses are rarely capped. 

The typical cap that can be negotiated with a landlord ranges from around 3 to 7% per year, so at least you have a feel for the maximum amount of rent increase you could incur in any given year to help you with your budget forecasting.

4. The current competitive market

To get an idea of the expenses you can expect, examine the property tax and cap rate data of similar properties in the area.

While you may be on the hunt for the lowest price, beware if your building’s operating expenses appear to be significantly lower than the market. It could signify a looming increase.

5. The potential impact of your building being sold

Even if you’re only renting a commercial space, consider the potential future. For example, what will happen if your landlord chooses to sell the property? A property sale can trigger a reassessment, which may result in increased real estate taxes.

Many operating expenses aren’t negotiable. After all, your landlord has their own expenses to cover. But if you look closely at your statements and take these 5 factors into consideration, you could save your business a bundle of money in the long run.

Still have questions about your operating costs or commercial real estate lease terms? We’re happy to help. Contact us now.