Operating Cost Review (Owner-Occupant or Landlord)

Whether you are the prospective Owner-Occupant or Landlord of a commercial property, a review of the operating cost/ft to run the property, is an important analysis to consider.  First to understand the concept, let’s look at the terms which exist within the industry - COMMON AREA MAINTENANCE (CAM), COMMON COSTS (CC), TAX MAINTENANCE INSURANCE (TMI) – all of which commonly are referred to as ‘Additional Rent’ within a typical lease document (to view our related post, from a leasing perspective, click here).

Regardless of how they are labelled, they consist of the cost/ft to operate the property in a given year. Typical costs include – property taxes, building/property insurance, maintenance/repair/management costs etc. They will vary from year to year, as the input costs (ie. taxes) will change on an annual basis.

In the case of an owner occupying a property for his own commercial purposes, this

review will reveal his cost/ft to operate out of this location. Beyond your mortgage

payments and equity contribution (downpayment), this represents the additional cost in operating your business at this property.  You almost look at it from the perspective of a tenant – as in lease terms, this would be viewed as ‘additional rent'.

In the case of a landlord (investor owner), this review will indicate how competitive

this property is against the overall market. Using an example of a typical retail plaza

center with an operating cost/ft of $8.50 – it is easy to see where you might be at a disadvantage in marketing space, when competitive sites reflect operating costs/ft at $7. A word of caution here though, as the “the devil is always in the details” – and more specifically, look closely at the budgets (line by line) provided, overall condition of the plaza, areas of deferred maintenance etc.

Remember that the costs for operating a plaza or business premises are either covered

by the tenants or the owner-occupant of the business. These are real dollar items that

need to be factored in as you analyze any transaction, and a sound per/ft analysis of

operating costs is simply good due diligence.

As always, consult with an experienced commercial broker in your market, to assist

in evaluating the operating costs on commercial properties which you are considering.