In CRE, “operating costs”, aka ops costs, aka operational costs, is an umbrella term for a basket of property expenses allocated by the landlord to the tenant.
Operating costs are those costs associated with operating and maintaining a commercial property (for specific expense types, please see “Examples of operating costs” below).
Operating costs generally appear as a line item on the rental invoice, and are included in the gross rental total. Such expenses are generally paid by the landlord, and then recovered from the tenant. They are thus an “in and out” on landlord’s property income statement. (It is understood that landlords do not make a margin on these costs)
The landlord (aka property fund) or, if applicable, their representative (i.e. a property manager) is responsible for the overhead of calculating and collecting these costs. Operating costs are generally allocated pro rata to the tenant/s, based on GLA, or another metric.
In a “triple net lease“, operating costs are borne by the tenant. I.e. the landlord’s rental cheque goes straight to the net profit on the income statement – without any deductions.
Note: there are no “hard and fast” rules in CRE generally (and, specifically, the determination of net or gross rentals by landlords). Prospective landlords can choose which expenses they include in their net rentals, and which expenses they push on to their tenants in gross rentals. The end lease terms and conditions are subject to negotiation** between all parties.
Examples of “operating costs”
- Rates and taxes
- City improvement district or park levies
- Generator costs
- Back up water supply costs
- Other “common area” expenses
Those expenses not included in gross rentals are either:
- For the account of the landlord (i.e. expenses included in net rentals), or
- Invoiced directly to the tenant, or
- Variable costs dependent on tenant consumption activity – such as electricity and water
Some points on “operating costs” vs “expenses included in gross rentals”
- Sometimes all the costs between net rental and gross rental are called, collectively, operating costs.
- Other times operating costs are listed alongside other individual “expenses included in gross rental” on an invoice.
Operating costs is therefore a subset of “expenses included in gross rentals”.
Budgeting for future financial obligations
Operating costs may escalate at a different rate to the landlord’s net rental.
In certain instances landlords have negotiated escalations with service providers and can provide visibility on such escalations. In other instances, such as rates and taxes, landlords (and thus tenants) are “price takers”.
Our recommendation to industry outsiders
When signing or renewing a lease, consider leaning on the expertise of an independent, well-rated, experienced CRE professional to advise you through the complexity. Here is an article unpacking some of the complexities that need to be considered during this process.