CRE 101 · deweyluong.realtor

Operating Expenses Explained: What OpEx Really Includes in a Georgia Commercial Lease and Valuation

Every valuation runs through one subtraction: EGI minus operating expenses equals NOI. Get the expense list wrong — leave out management and reserves, or underwrite the seller's old tax bill — and the price is wrong by hundreds of thousands of dollars. This page lists what OpEx really includes, what it excludes, who pays it under each lease type, and works a full expense load on one retail center. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or lending advice.

What counts as OpEx — and what does not

• Counts: property taxes, insurance, CAM and common-area costs, landlord-paid utilities, repairs and routine maintenance, landscaping, trash, on-site staff, property accounting, a market-rate management fee, and replacement reserves in a careful underwrite.
• Does NOT count — debt service: mortgage principal and interest are financing. They sit below NOI and never enter OpEx, no matter how large the loan is.
• Does NOT count — capital expenditures (capex): a new roof or a resurfaced parking lot is a capital item spent once and used for years. The annual reserve that funds capex belongs in the underwrite; the project itself is not one year's OpEx.
• Does NOT count — tenant improvements and leasing commissions: TI allowances and broker commissions are leasing costs, tracked below NOI with the deal that caused them — not operating costs of the building.
• Also excluded: depreciation, the owner's income taxes, and costs of a different property. When a seller's statement mixes any of these in — or quietly leaves real OpEx out — rebuild the statement line by line from the T-12, tax bills, and insurance quotes.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• The property: a 20,000 SF Gwinnett retail center with effective gross income (EGI) of $300,000.
• Property taxes: $38,000. Insurance: $18,000. CAM / common-area: $24,000.
• Management fee: 4% of EGI = 0.04 × $300,000 = $12,000 — charged whether a third-party manager collects it or the owner self-manages.
• Replacement reserves: $0.25/SF × 20,000 SF = $5,000.
• Total OpEx: $38,000 + $18,000 + $24,000 + $12,000 + $5,000 = $97,000.
• OpEx per SF: $97,000 ÷ 20,000 = $4.85/SF. OpEx ratio: $97,000 ÷ $300,000 = 32.3% of EGI.
• NOI: $300,000 − $97,000 = $203,000. That NOI — not the seller's version — is what a cap rate is applied to.
• The trap, priced: a seller who excludes management and reserves understates OpEx by $12,000 + $5,000 = $17,000. At a 6.5% cap rate, $17,000 ÷ 0.065 = about $261,538 of overstated value — paid by the buyer, for expenses the buyer will absolutely incur.

Recoverable vs non-recoverable: who actually pays

• Recoverable expenses are OpEx the lease lets the landlord bill back to tenants — typically taxes, insurance, and CAM in a net lease. Non-recoverable expenses stay with the landlord: most capital items, leasing commissions and TI, legal costs of a lease dispute, and any management fee above the cap the lease allows.
• NNN leases — direct pass-through: in a triple-net lease, tenants reimburse their share of taxes, insurance, and CAM on top of base rent, usually estimated monthly and reconciled annually. The landlord's real exposure is the vacant space's share and anything the lease excludes.
• Gross leases — expense stops and base years: the landlord pays OpEx out of a single gross rent, but an expense stop sets a per-SF ceiling on the landlord's share, and a base-year structure fixes the landlord's share at the first year's expense level. Tenants reimburse increases above the stop or base year. Underwrite a gross-lease building on where expenses are going, not where the base year froze them.
• Vacancy changes the math: pass-throughs are usually billed on occupied share or grossed up (see the traps below). A half-empty center leaves the landlord holding the vacant units' share of every recoverable dollar.

Controllable vs uncontrollable expenses

• Uncontrollable: property taxes, insurance premiums, and regulated utility rates. The owner can appeal, shop, or bid them at the margins — see property tax appeals — but cannot manage them to zero. Underwrite them at tomorrow's level, not today's.
• Controllable: CAM contracts, landscaping, repairs, on-site staff, and the management fee. These are where a good operator actually moves NOI: rebidding contracts and tightening service scopes cuts real dollars without touching rent.
• Why the split matters: when a seller promises expenses will fall after closing, ask which side of this line the savings sit on. Controllable savings are a plan; uncontrollable savings are a hope.

Why the OpEx ratio varies by property type

• Retail (NNN-heavy): much of the load passes through to tenants, so the landlord's unrecovered ratio can look low — until vacancy leaves the owner holding the empty units' share.
• Office (gross-heavy): full-service rents carry janitorial, elevators, HVAC hours, and staff inside the landlord's number, so ratios run materially higher than retail on the same EGI.
• Industrial: simpler buildings, fewer services, and net structures usually mean the lowest expense load per SF — the big lines are taxes and insurance, not services.
• Multifamily: the owner pays nearly everything — payroll, turns, utilities, contracts — with no tenant pass-through mechanism, so ratios commonly sit well above net-leased retail. A 32.3% ratio that is normal for one property type can be a red flag or a bargain signal in another; never compare ratios across types without the lease structure.

Four OpEx traps

• Excluded management and reserves: the most common understatement in a seller's package. Price in the worked example: $17,000 of missing expenses becomes about $261,538 of phantom value at a 6.5% cap. Always insert a market management fee and a reserve line before you price NOI.
• Pro-forma taxes at the seller's old bill: in Georgia, a sale commonly triggers reassessment toward the new value, and the buyer's tax bill can jump well above the seller's. Underwrite taxes off the purchase price and the county's millage — not off the seller's T-12 line.
• Insurance spikes: premiums reprice at renewal, not at closing, and Georgia carriers have raised retail and older-roof pricing sharply in recent cycles. Quote the property as a buyer, with its real roof age, before you trust the seller's insurance line.
• No gross-up: expenses that vary with occupancy — janitorial, utilities, trash — must be grossed up to a stabilized occupancy (commonly 95%) before you compute recoveries or compare buildings. A 60%-occupied center's raw CAM per SF understates what the expense load looks like full, and overstates what tenants will reimburse.

Cho nhà đầu tư người Việt

OpEx (chi phí vận hành) là chi phí lặp lại hàng năm để giữ một tài sản thương mại hoạt động: thuế tài sản, bảo hiểm, CAM, phí quản lý và quỹ dự phòng thay thế. Nợ vay, capex, TI và hoa hồng môi giới thuê không phải OpEx. Trong ví dụ trên trang này (số liệu giả định): trung tâm bán lẻ 20.000 SF ở Gwinnett có EGI $300.000 và OpEx $97.000 — thuế $38.000, bảo hiểm $18.000, CAM $24.000, quản lý 4% EGI = $12.000, dự phòng $0,25/SF = $5.000 — tức $4,85/SF, tỷ lệ OpEx 32,3%, và NOI = $203.000. Nếu người bán bỏ phí quản lý và dự phòng, OpEx bị thiếu $17.000 và ở cap rate 6,5% giá trị bị thổi phồng khoảng $261.538. Hai lưu ý thêm: ở Georgia thuế thường bị định giá lại sau khi mua bán, và hợp đồng NNN chuyển phần lớn OpEx sang người thuê trong khi hợp đồng gross dùng expense stop hoặc base year — phải đọc kỹ định nghĩa chi phí trong hợp đồng trước khi định giá. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

Frequently asked questions

What are operating expenses (OpEx) in commercial real estate?

Operating expenses are the recurring costs of running and maintaining a commercial property so it can produce rent: property taxes, insurance, common-area maintenance (CAM), utilities the landlord pays, repairs and routine maintenance, landscaping, snow and trash service, on-site staff, accounting and legal for property operations, a market-rate management fee, and — in a careful underwrite — replacement reserves. The test is simple: does the property need this cost every year to stay open and leasable? If yes, it belongs in OpEx, and NOI = effective gross income (EGI) minus OpEx. In the worked example on this page, a 20,000 SF Gwinnett retail center with $300,000 of EGI carries $97,000 of OpEx, so NOI is $203,000.

What is NOT included in operating expenses?

Four big categories are not OpEx, and mixing them in — or leaving real OpEx out — distorts value. (1) Debt service: mortgage principal and interest are financing, not operations; they sit below NOI. (2) Capital expenditures (capex): a new roof, a resurfaced parking lot, or a replaced HVAC system are capital items amortized over years, not one year's operating cost — though the annual reserve that funds them does belong in a careful underwrite. (3) Tenant improvements (TI): build-out money spent to land a specific tenant is a leasing cost, not an operating cost. (4) Leasing commissions: broker fees for signing a lease are also leasing costs, tracked separately below NOI along with TI. Depreciation and the owner's income taxes are likewise not OpEx.

How do you calculate the OpEx ratio and OpEx per square foot?

OpEx per square foot = total operating expenses ÷ rentable square feet. OpEx ratio = total operating expenses ÷ effective gross income. Worked example, made-up numbers: taxes $38,000 + insurance $18,000 + CAM $24,000 + management at 4% of EGI ($12,000) + reserves at $0.25/SF ($5,000) = $97,000 of OpEx on a 20,000 SF center. OpEx per SF = $97,000 ÷ 20,000 = $4.85/SF. OpEx ratio = $97,000 ÷ $300,000 of EGI = 32.3%. NOI = $300,000 − $97,000 = $203,000. Compare both figures against similar properties: per-SF shows whether the building is run expensively, the ratio shows how much of every income dollar operations consume.

Who actually pays operating expenses — the landlord or the tenant?

It depends on the lease structure, which is why OpEx is also a lease negotiation, not just an accounting line. In a triple-net (NNN) lease, tenants pay most operating expenses directly as pass-throughs on top of base rent, so the landlord's unrecovered OpEx is small. In a gross or full-service lease, the landlord pays OpEx out of the rent, but an expense stop or a base year caps the landlord's share: the landlord absorbs expenses up to the stop (or the base-year level), and tenants reimburse increases above it. Some expenses are recoverable from tenants and some are not — capital items, leasing costs, and management fees above the lease's stated cap are commonly non-recoverable. Read the lease's OpEx definition and exclusions before you underwrite the recoveries.

Chi phí vận hành (OpEx) là gì, chủ doanh nghiệp và nhà đầu tư người Việt cần lưu ý gì?

OpEx là chi phí lặp lại hàng năm để vận hành một tài sản thương mại: thuế tài sản, bảo hiểm, CAM (bảo trì khu vực chung), quản lý, và quỹ dự phòng thay thế. Nợ vay (debt service), chi phí vốn lớn (capex), tiền xây dựng cho người thuê (TI) và hoa hồng môi giới thuê (leasing commissions) KHÔNG phải OpEx. Ví dụ trên trang này (số liệu giả định): trung tâm bán lẻ 20.000 SF ở Gwinnett, EGI $300.000, OpEx $97.000 (thuế $38.000 + bảo hiểm $18.000 + CAM $24.000 + phí quản lý 4% = $12.000 + dự phòng $0,25/SF = $5.000), tức $4,85/SF và tỷ lệ OpEx 32,3%, nên NOI = $203.000. Ba lưu ý: (1) nếu người bán bỏ phí quản lý và dự phòng ($17.000), giá trị bị thổi phồng khoảng $261.538 ở cap rate 6,5%; (2) ở Georgia, thuế tài sản thường bị định giá lại sau khi bán, nên đừng dùng mức thuế cũ của người bán; (3) hợp đồng NNN chuyển phần lớn OpEx cho người thuê, còn hợp đồng gross dùng expense stop hoặc năm cơ sở (base year) — phải đọc định nghĩa OpEx trong hợp đồng. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com