Anyone involved in operating a commercial property is familiar with the numerous expenses related to operation and upkeep. Although it may seem as though you’re operating at a loss, there are many ways to recover some of the costs that are associated with operating a commercial property. When you become involved in operating commercial real estate, you will encounter terms like common area maintenance (CAM) fees, expense reimbursement, or expense recovery. But what are these fees, and how can you get reimbursed for expenses? In this article we’ll explore some of the main costs of operating a commercial property that are eligible for expense recovery, and how to recover these expenses from tenants.
What are Operating Expenses?
First, let’s identify what operating expenses are. The costs associated with both maintaining and operating a commercial property such as a retail center or office building are called operating expenses. The total amount of money spent to facilitate in the function and operation of a property are referred to as operating expenses. Some common operating costs for commercial real estate include taxes imposed upon the commercial property, utilities, insurance for the property, on and off-site management fees, maintenance and repairs, and expenses such as the cost of legal services and accounting services.
Operating expenses are mostly composed of the costs that arise from property taxes, insurance, and Common Area Maintenance (CAM) fees. Property taxes are the taxes that are imposed by taxing entities and billed to the property owner, and vary by state. Since insurance is required by most lenders that are financing a property, the cost to ensure the building is considered to be a common operating expense.
Common Area Maintenance fees are expenses which typically include fees related to utilities and repairs, fees imposed by the property’s management or administrative team, and other expenses that might include management or repair of surrounding facilities, like walkways or a parking garage. The expenses included in CAM fees vary by landlord or property owner, so make sure that you know what your CAM costs and fees are.
There are limits to what can be categorized as an operating expense. For example, operating expenses should never include debt services, marketing costs for the property, CAPEX, capital reserves for repair projects, tenant improvement allowances or leasing commissions. To respect the legality of recovering the expenses that arise from operating a commercial property, make sure that the reimbursable amount being billed to tenants only includes what can be categorized as an operating expense.
Most operating expenses are non-negotiable, so once you calculate every cost that can be included as an operating expense, the expenses can be passed directly to the tenant. For example, the tax and insurance components of operating expenses are non-negotiable. Since these factors are considered uncontrollable, they can be passed directly through to be billed to the tenant.
Some operating expenses are controllable, such as CAM fees. The Common Area Management fees are somewhat negotiable because landlords and property managers can control how efficiently a building is being managed. A common form of tenant protection involves negotiating a cap on the annual operating expense escalations, so the tenants won’t face exponential charges due to issues related to management. Be prepared to set this cost at a fair level to collect it from tenants without violating any of their protections.
The best advice for recovering the operating expenses of a commercial property is that you should take it upon yourself to pay bills as they are due, rather than billing expenses such as insurance, taxes, or utilities directly to your tenants. Unfortunately, some tenants are unreliable and might not pay bills on time. To ensure everything is paid on time, pay your bills as they come and then bill your tenants for the appropriate amount that can be reimbursed.
In the end, the best way to recover the operating expense of a commercial property is to calculate the operating expense, stay on top of the bills that are directed to you, and then bill your tenants for the reimbursable amount. At Landwin Commercial Real Estate we’re proud of the investment returns that we deliver to our clients, including assistance with calculating operating expenses and aiding in their recovery. Since 1987, Landwin Commercial Real Estate has been a trusted and experienced commercial real estate investment group. Our experienced, dedicated real estate professionals are committed to delivering superior client care and results.