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Investor Glossary
Last updated on Feb 19, 2023
2 min read

Operating Expenditures

Operating expenditures (OpEx) are any ongoing costs incurred in the everyday operation and maintenance of the commercial property.

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What are Operating Expenditures in Self Storage?

In commercial real estate, operating expenditures (OpEx) are any ongoing costs incurred in the everyday operation and maintenance of the commercial property. Expenses typically defined as OpEx include smaller and more frequent costs like utilities, payroll, maintenance, repairs, and in some cases, even rent. Unlike the IRS’ stance on Capital Expenditures (CapEx) — which are investments made to extend an asset’s economic lifespan — OpEx costs are fully tax-deductible in the year they are incurred.

Operating expenditures are directly related to operating and maintenance expenses (O&M), which include costs such as utility installation charges and deposits, maintenance equipment purchases, property and liability insurance premiums, purchase of office equipment and furniture, advertising expenses, management fees, etc. Almost all of the possible expenses that are considered to be O&M are operational expenditures — with one exception: OpEx does NOT include taxes or debt service. OpEx expenses may be small when looked at individually, but in total can account for up to 50% of a building's lifecycle costs.

Operating Expenditures are an unavoidable part of owning and operating a commercial property. As a means of gaining a competitive advantage and increasing profit, most commercial property owners seek to reduce operating expenditures as much as possible without hurting or hindering the daily operations of the asset.

Related Questions

What are operating expenditures in commercial real estate?

Operating expenditures, often abbreviated as OpEx, are ongoing costs incurred in the everyday business operations of a commercial property. These expenses can include utilities, wages, maintenance, repairs, marketing, accounting, and legal fees.

While operating expenses are usually necessary for seamless operation, property and business managers are responsible for keeping expenses as low as possible, without affecting the business's ability to stay profitable and competitive in the market. It’s important to make sure that reducing the expenses doesn’t compromise the quality of the operation of your business.

If you would like to learn more about commercial real estate loan products, please fill out the form here to speak with a commercial real estate loan specialist.

What are the most common operating expenses for a small business?

The most common operating expenses for a small business include utilities, maintenance, payroll, administrative costs, management fees, and commercial expenses.

Utilities include fuel, gas, electricity, and water and sewer. Maintenance includes elevator, decorating, repairs/building maintenance, trash, exterminating/pest control, parking/snow, supplies, cleaning/turnover, contracts, and miscellaneous. Payroll includes manager salary, manager apartment allowance, maintenance salary, caretaker salary, caretaker apartment allowance, other salaries, commissions/bonus, benefits, worker's comp, and payroll taxes. Administrative costs include advertising, telephone, legal/audit, professional fees, office expenses, corporate expenses, licenses/dues, model apartments/leasing, trend adjustment, and TDHCA compliance. Management fees and commercial expenses are also common operating expenses.

For more information, please see OpEx: Operating Expenses and Detailed Operating Statement & Underwriting Analysis.

How can I reduce operating costs for my small business?

One way to reduce operating costs for your small business is to implement smart building technology. Smart technology can help you and your tenants save on energy costs, and even something as seemingly minor as replacing interior and exterior lighting with LED bulbs can have a huge impact on lowering your property’s energy costs. Additionally, you can manage your expenses carefully by taking a close look at your operating expenses and seeing if there are any areas where you can cut back without compromising your business. This will help ensure that your business is better positioned to weather any economic storms that may come your way.

What are the tax implications of operating expenses in commercial real estate?

Operating expenses in commercial real estate are generally tax deductible. This includes things like repairs and maintenance, employee wages, independent contractor costs, and professional fees. It is important to keep track of all of these expenses and itemize them when filing taxes. Larger changes to the property could qualify as capital improvements, and these would have to be depreciated over the course of several years. For more information, please see this article on Federal Tax Implications for Commercial Real Estate in 2022.

What are the best strategies for managing operating expenses in a small business?

The best strategies for managing operating expenses in a small business are to take a close look at your operating expenses and see if there are any areas where you can cut back without compromising your business. Additionally, it's important to aim for an Operating Expense Ratio (OER) between 60% and 80%, as this is broadly considered ideal.

For more information, please see the following sources:

  • 6 Ways CRE Investors Can Prepare for a Recession
  • Operating Expense Ratio Explained

How can I maximize my return on operating expenses in commercial real estate?

The best way to maximize your return on operating expenses in commercial real estate is to compare similar properties to determine if a property is being effectively managed. For example, if an investor wants to purchase a industrial property with a 55% OER, and most similar industrial properties in the area have a 40% OER, the investor could probably conclude that the property is not being managed effectively. Additionally, a year-by-year OER comparison can also be used on the same property to determine if expenses are rising too rapidly in a particular area (i.e. utilities). That, in turn, can be used to determine an action plan to cut costs (i.e. energy efficient building improvements).

In addition to comparing different properties, you can also maximize your return on operating expenses by following the tips outlined in this article. These strategies can help you achieve your goals and make informed decisions about your investments.

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