OpEx: Operating Expenses
OpEx Meaning
OpEx in commercial real estate lingo is a shortened version of the term operating expenses (or operating expenditures).
What Are Operating Expenses?
Operating expenses are the ongoing costs that are incurred in the day-to-day operation and maintenance of a commercial property. OpEx costs are a stark contrast to capital expenses, or CapEx, which are expenditures related to long-term improvements, additions, equipment acquisition, and repairs that extend the life of a property. Unlike with CapEx, operating expenses are fully tax deductible for the year they are incurred.
What Is Included in Operating Expenses?
OpEx includes most, if not all, expenses incurred in the day-to-day operations of the business. In the context of commercial real estate specifically, OpEx is directly related to O&M — operating and maintenance expenses. Importantly, OpEx does not include taxes or debt service.
Operating expenses include (but are not limited to):
- Utilities
- Property management
- Payroll
- Maintenance
- Minor repairs
- Rent
- Supplies
- Office expenses
- Insurance
- Software expenses
- Operating leases
- Depreciation expense
What are the most common operating expenses associated with apartment loans?
The most common operating expenses associated with apartment loans include utilities, property management, payroll, maintenance, minor repairs, property taxes, office expenses, insurance, software expenses, contracts, and depreciation expenses. These expenses are typically included in operating expenditures (OpEx) and can be subtracted from a property’s gross income to find the net operating income (NOI).
Specifically for multifamily real estate, operating expenditures include (but are not limited to):
- Utilities
- Property management
- Payroll
- Maintenance
- Minor repairs
- Property taxes
- Office expenses
- Insurance
- Software expenses
- Contracts
- Depreciation expenses
When looking at a multifamily project, it's important to examine both the fixed and operating expenses. The fixed expenses for a property, which typically do not change (or do not change much), include real estate taxes, other taxes and assessments, insurance, and ground rent.
Many developers already understand that small expenses can add up. So, it’s essential to list all the potential operating expenses of a multifamily project in order to determine its long-term profitability. Operating expenses usually include:
- Utilities, including:
- Fuel
- Gas
- Electricity
- Water and sewer
- Maintenance, including:
- Elevator
- Decorating
- Repairs/building maintenance
- Trash
- Exterminating/pest control
- Parking/snow
- Supplies
- Cleaning/turnover
- Contracts
- Misc.
- Payroll, including:
- Manager salary
- Manager apt. allowance
- Maintenance salary
- Caretaker salary
- Caretaker apt. allowance
- Other salaries
- Commissions/bonus
- Benefits
- Worker's comp
- Payroll taxes
- Administrative, including:
- Advertising
- Telephone
- Legal/audit
- Professional fees
- Office expenses
- Corporate expenses
- Licenses/dues
- Model apts./leasing
- Trend adjustment
- TDHCA compliance
- Management fees
- Commercial expenses
What are the differences between fixed and variable operating expenses?
Fixed expenses for a property typically do not change (or do not change much) and include real estate taxes, other taxes and assessments, insurance, and ground rent. Operating expenses are the ongoing costs that are incurred in the day-to-day operation and maintenance of a commercial property. Unlike with capital expenses, operating expenses are fully tax deductible for the year they are incurred.
The key difference between fixed and variable operating expenses is that fixed expenses are typically fixed costs that do not change, while variable expenses are costs that can change depending on the situation. For example, a fixed expense could be real estate taxes, while a variable expense could be the cost of utilities.
How can I reduce operating expenses when applying for an apartment loan?
When applying for an apartment loan, there are several ways to reduce operating expenses. One way is to negotiate a lower interest rate with the lender. This can be done by shopping around for the best rates and terms, as well as by providing a larger down payment. Additionally, you can look into loan products that offer longer amortization periods, which can help reduce monthly payments. Finally, you can look into loan products that offer more lenient prepayment penalties, which can help reduce the overall cost of the loan.
For more information on apartment loans, please visit Apartment.Loans.
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What are the tax implications of operating expenses associated with apartment loans?
Operating expenses associated with apartment loans are generally tax deductible. According to Apartment.loans, these expenses include employee wages, independent contractor costs, and professional fees. Additionally, according to Commercialrealestate.loans, these expenses can include legal fees, property management fees, and accounting fees.
What are the best strategies for managing operating expenses when applying for an apartment loan?
The best strategies for managing operating expenses when applying for an apartment loan are to ensure that the property has a debt service coverage ratio (DSCR) of 1.25-1.30x, and to have a down payment of 25-30% of the total loan amount. Additionally, it is important to have good credit (660+ is typically expected).
For more information, please see the following sources:
Each of the above expenses would be listed as a separate line item on the income statement for a commercial property. The operating expenses can be subtracted from a property’s gross income to find the Net Operating Income, or NOI — a primary indicator of an asset’s value.