In commercial real estate, operating expenses are often treated as fine print, yet they can significantly influence the overall financial performance of a lease. For multi-location occupiers, understanding these clauses is essential to effective financial planning and portfolio management.
What Are Operating Expenses in a Lease?
Operating expenses represent the costs a landlord incurs to operate and maintain a property. These are commonly allocated to tenants through lease agreements, particularly in net and modified gross structures. Typical inclusions are:
- Property taxes
- Insurance premiums
- Common Area Maintenance (CAM)
- Management and administrative fees
- Utilities (shared spaces)
- Security, janitorial, landscaping, and snow removal
- Repairs and maintenance (excluding capital improvements)
The way these expenses are allocated varies by lease structure triple net (NNN), modified gross, or full-service gross. Within each framework, small differences in definitions and calculations can materially influence the tenant’s overall costs.
Key Clauses That Shape Operating Costs
| Clause | Key Consideration |
| Capital Expenditures | Spread costs over the improvement’s useful life, not as a one-time charge. |
| Management Fees | Keep reasonable and tied to actual services; avoid extra administrative markups. |
| Gross-Up Provisions | Apply only to variable expenses such as utilities. |
| Exclusions | Exclude non-operating costs like commissions, unrelated projects, and legal fees. |
These clauses, while often overlooked, can have a meaningful impact on long-term lease performance and financial accuracy. Reviewing them carefully helps tenants maintain clarity, fairness, and cost control throughout the lease term.
The Value of Operating Expense Reviews
Regular operating expense reviews provide clarity by comparing billed charges to actual, eligible costs. This process helps tenants verify accuracy, prevent overpayments, and maintain transparency throughout the lease term.
Case Example
| Description | Amount (USD) |
| Total additional operating expenses billed | $4,000 |
| Excluded costs (capital improvements) | – $1,200 |
| Adjusted tenant obligation | $2,800 |
| Savings achieved | 30% reduction |
Insight: A simple review of billed expenses led to a 30% cost reduction. Across multiple years or lease locations, such adjustments can translate into significant savings and improved financial predictability.
Best Practices for Tenants
Request detailed annual reconciliations
Ask for a yearly comparison of estimated and actual operating costs to maintain transparency and catch discrepancies early.
Negotiate audit rights to validate expenses
Include audit rights in your lease to verify charges and prevent overbilling.
Seek caps on controllable costs, such as maintenance or landscaping
Set limits typically around 5% on annual increases for controllable costs like maintenance or landscaping to stabilize budgets.
Why These Clauses Matter
Operating expense clauses may seem minor during negotiations, but their impact grows over time. Even small variations can affect cash flow and forecasting. Treating these provisions as a strategic part of the lease helps organizations protect budgets and maintain long-term stability.
How Mohr Partners Supports Clients
At Mohr Partners, we know operating expense provisions go beyond numbers they directly affect business performance. Our team helps clients:
- Review and negotiate lease terms with accuracy
- Audit expenses to ensure compliance
- Uncover cost-saving opportunities across portfolios
What may seem like a minor clause can have lasting financial impact. With the right expertise, these provisions become a source of clarity and measurable savings.
