Commercial Operating Expenses

[Alan Feldman]

I understand best practice for residential is to plan for 50% operating expenses, but what about commercial operating expenses?

[Oren K.]

Alan,

Firstly don't believe everything you read ;), Yes over the long term, commercial multi-family does trend towards the mean of ~50% but New Build, Just Rehabbed, Older Buildings, etc, have very different operating characteristics. As well, you should not compare SFR or Residential MFR with commercial MFR. In an area of rising rents and everything else staying stable, by definition, operating expense ratios will decrease.

From all the non-residential commercial investment opportunities I have reviewed, expenses seem to hover in the ~25-35% range. I have seen legitimately better and worse by a wide margin as local area rents / utilities / taxes / building services each play a big role.

Also, from a landlords perspective, it depends on what gets passed on to the tenants (e.g. NNN (all), Modified Gross (some), Gross (none)). On true NNN leases, the tenants are reimbursing for all expenses including management and CAPEX; @Joel Owens - care to pipe-in.

Oren