Operating Expense

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Operating Expense

Operating Expenses (OPEX) are an important element of commercial real estate investment performance. Landlords incur operating expenses to pay for real estate taxes, insurance and the maintenance of common areas of office buildings, shopping centers, industrial buildings and other multi-tenant commercial buildings. To recoup these costs, provisions in commercial real estate leases allow landlords to charge tenants a pro rata portion of the total operating expenses based on the square footage each tenant occupies. Tenants can reduce their leasehold occupancy costs by negotiating with the landlord to limit the type and kind of operating expenses charged to the tenant.

Operating expenses generally have two parts: a variable cost component, which changes with the gross income generated by the property, and a fixed cost component, which stays the same in a given property regardless of income. The interaction between these two elements implies that while OPEX varies with the gross income cycle—increasing or dropping with changes in vacancies and rents—there is a fixed cost floor, determined by the fixed cost element, below which costs never fall.

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