Regardless of how your lease is structured, one way or another, your business pays its share of the operating expenses for the building(s) that you occupy. As such, understanding what goes into the expenses for your spaces can help you prepare to better manage those costs.
A large percentage of your rent will go to operating expenses. Hence, it is important to know how it works, so you can negotiate effectively with your landlord and possibly minimize it. This article will help you understand operating expenses, the types of operating expenses as well as controlling operating expenses.
Understanding Operating Expenses
In the simplest possible terms, operating expenses are what it costs to run a building. They include everything from keeping the lights in the hallway on to sweeping the parking lot and maintaining the elevators that everyone shares. In triple net lease structures, you get billed for your pro-rata share of those expenses, but when you have a full-service lease, the cost of those expenses are built into your lease payment. In either case, you're still paying for the cost of running the building.
One key difference is that when you're billed directly for a service, you have control over how much it costs. If you pay for your own electricity through a separate meter then leave your lights on, you pay more. On the other hand, if you set your thermostat to 73 in summer, you pay less. When you pay a pro-rata share of the operating expenses, though, you have less control over what you pay. You could be the most environmentally-friendly tenant in the building and generate zero garbage but if everyone else fills the dumpster, you're still going to pay some of that trash bill.
Types of Operating Expenses
Frequently referred to as OPEX, operating expenses are all of the costs that go into running a building. These include utilities, repairs and maintenance, exterior work, insurance, management, and property tax. Different buildings and building types might have some of these expenses billed directly to you, but they are all operating expenses.
One way to think about operating expenses is that they are the expenses that need to be there for the building to work for you as a tenant. You need the lot to be cleaned of snow in the winter, you need the property taxes to be paid so that the building won't be seized by the local government and you need water in the pipes so that you can use your restroom. Your business also needs someone to oversee the building so that nothing bad happens.
OPEX and Your Lease
The way that you pay your share of operating expenses depends on the structure of your lease. In a triple net lease, you pay the expenses that are directly billed to you (electricity and communications are common ones) and you pay your pro-rata share of the shared building expenses. For these expenses, like landscaping and property taxes, the landlord calculates how much of the total building you occupy and bills you for your share. If you are a 10,000 square foot tenant in a 100,000 square foot building, you occupy 10 percent of the building and would pay 10 percent of the $50,000 property tax bill -- $5,000.
On the other extreme, you find full-service leases, sometimes referred to as "gross" leases. In these leases, you make a single payment to the landlord for rent and all of your operating expenses are included. However, don't think that your OPEX is free. Instead, it's just bundled into the (higher) rent. You or your tenant representative needs to do the math to see whether a full-service lease is a better deal than paying separately for net rent and operating expenses.
In between the two extremes, you find modified gross, single net and other lease structures. The meaning of each lease type varies, but they typically involve you paying some of the buildings' OPEX independently of your net rent.
Controlling Operating Expenses
Your ability to control operating expenses varies depending on the type of expense and on how you are billed for it. When you are directly billed for an expense -- like the electricity bill in a standalone building -- you have control over what you spend and can do things like install LED lighting or turn the lights off at night. In a full-service building, you have much less influence on your costs, since any reduction in OPEX just accrues to the owner's benefit.
When you are billed for your pro-rata share of expenses, you have a couple of ways to control expenses. First, if you are more efficient, you will lower the building's overall operating expenses. Your co-tenants will get the benefit of your efficiency, too, but you'll still be saving money. Second, you can work with your landlord to run the building more efficiently. Rebidding vendor contracts, protesting property tax assessments and the like can all lower your costs. And, while it's the landlord's job to do it, working in partnership with him or her can help ensure that it gets done.
Control Means Savings
As we said above, if you have control over the billed amount of the expenses, you can save money. Whether you opt to do your tenant improvements with high-efficiency lighting or make do with less frequent janitorial service, there are many ways to cut costs. Your office staff might even be able to handle simple maintenance tasks like changing light bulbs, touching up paint scuffs or even snaking stuck toilets or drains (if your lease allows it) to reduce your repair bills.
You can have a degree of control over shared operating expenses, too. If your lease gives you the right to have CAM audits done, consider requesting one of your expenses seem out of the norm. An audit may be able to catch calculation errors on your landlord's part. In addition, you may also have the ability to talk with your landlord about rebidding services, protesting property taxes, or taking other actions that can save you, your co-tenants and potentially even the owner some money all at once.
Your Landlord Knows
Bear in mind that your landlord also knows what type of tenant you are. While refraining from fully using your leased space in an attempt to save your landlord money might not the best thing for your business, being a good tenant of the building and good steward of its resources can pay off. Whether you need leniency on a building rule to allow your employees to have a "take your dog to work day" or you want the best treatment possible when your renewal negotiation comes up, taking good care of the building and its operating expenses may have other long-term benefits for you beyond just saving a few cents per square foot in the near term.
Unless you own your building, it might seem like the operating expenses for your company's commercial real estate portfolio are not particularly important. After all, they're the landlord's problem, right? Wrong.
One way or another, you pay the operating expenses for your space. Understanding what goes into them and how you can potentially impact them -- for good or for bad -- helps you create a more efficient tenancy. It may also help you in future negotiations with your landlord.
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