Operating Expenses
Operating expense means the recurring cost of running and maintaining a property or business in a commercial lease or accounting context. The operating expenses definition usually refers to recoverable OpEx such as CAM, real estate taxes, insurance, utilities, janitorial, repairs, and management fees, subject to lease exclusions.
Firm impact
The operating expense pool is the source of every billable overcharge. In a triple net lease, tenants often pay operating expenses on top of base rent. In a gross lease or base year lease, the landlord may absorb some costs until expenses exceed the base year or expense stop. Firms that understand the lease structure can separate recoverable OpEx from landlord-only costs.
How this gets abused
A landlord's operating expense pool included loan interest payments ($120,000), leasing commissions ($85,000), capital expenditures for a roof replacement ($210,000), and the CEO's salary ($180,000). All four categories were barred by lease exclusions. These additions inflated the pool by $595,000 before the tenant's share was calculated.
Practitioner note
Review the operating expense definition, lease exclusions, gross lease or triple net lease structure, base year, expense stop, and reconciliation statement before classifying costs. The scope of recoverable operating expenses is a function of lease language, not accounting convention.
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Frequently asked questions
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