By Barry Hardwick, CCIM
In commercial real estate, property operating expenses are often referred to as NNN charges, CAM (Common Area Maintenance), or simply operating expenses. While the terminology may vary, the concept is consistent: every property—whether owner-occupied or leased—incurs costs to operate and maintain the asset.
These costs include real estate taxes, insurance, and the day-to-day expenses required to keep the property functional. Let’s look at each. All properties are taxed, and depending on the jurisdiction, property taxes can be one of the largest expenses incurred in owning or leasing a property. Insurance covers both liability protection and casualty events such as storms, fire, or flooding. Operating costs include utilities, janitorial services, and the maintenance of critical building components such as HVAC, plumbing, electrical, roofing, and life safety systems. The type and intensity of these expenses are largely driven by the property’s use. For example, a warehouse distribution facility will not have the same systems or cost structure as a high-rise office building.
The most important question is not whether these expenses exist, but rather who is responsible for performing and maintaining them—and who pays the cost.
Lease structures vary widely, and the allocation of expenses between landlord and tenant can significantly impact the total cost of occupancy. At one end of the spectrum is the absolute triple net lease, where the tenant is responsible for all operating expenses, leaving the landlord with little to no financial obligation beyond ownership. These are commonly found in long-term, single-tenant or build-to-suit properties.
At the other end is the gross lease, where the landlord pays all operating expenses and the tenant pays a higher base rent. While this may appear simpler, the cost of those expenses is still embedded in the rent.
Most leases, however, fall somewhere in between and are structured as modified leases. In a single-tenant environment, the tenant often pays operating expenses directly, while the landlord remains responsible for major capital items. In multi-tenant properties such as shopping centers or office buildings, the landlord typically manages and pays for shared or “common” expenses—such as taxes, insurance, landscaping, parking lot maintenance, and roofing—while tenants pay for expenses within their own space.
In these multi-tenant settings, tenants are also required to reimburse the landlord for their proportional share of common expenses. This is typically handled through monthly estimated payments, similar to an escrow account, followed by an annual reconciliation to account for actual costs.
A retail tenant may move into a shopping center with an existing HVAC unit that is already several years old. Three years into the lease, the unit fails and must be replaced at the tenant’s expense—resulting in a significant capital outlay for a building system they cannot take with them when the lease expires.
Similarly, a tenant may sign a lease with what appears to be reasonable CAM charges, only to see those costs increase significantly after a major parking lot repair or roof replacement. If the lease does not cap or clearly define these expenses, the tenant may be required to absorb their pro-rata share of costs they did not anticipate.
Additional lease structures may include an expense stop or a base year. With an expense stop, the landlord agrees to cover operating expenses up to a defined level, with the tenant responsible for costs above that threshold. A base year structure operates similarly, with the landlord covering expenses in the first year and the tenant paying increases in subsequent years.
Understanding these structures is critical because operating expenses directly impact your total occupancy cost. Two leases with identical base rent can result in very different overall costs depending on how expenses are defined, controlled, and allocated. Without a clear understanding of these provisions, tenants can find themselves exposed to unexpected—and sometimes significant—additional costs.
Before signing a lease—or even if you are currently operating under one—it is essential to fully understand how operating expenses are structured and how they affect your business. Knowing what you are responsible for, how costs are calculated, and whether there are any limitations or protections in place can make a meaningful difference in your bottom line.
I would welcome the opportunity to review your lease with you and walk through these details. A brief conversation today can help you avoid costly surprises tomorrow.
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