What counts as an operating expense in commercial real estate?

Property taxes, insurance, utilities paid by the landlord, repairs and maintenance, property management fees, on-site payroll, marketing and administrative costs. Some conventions also count a replacement reserve; Fannie Mae and CMBS lenders deduct it below the NOI line instead.

Is mortgage interest an operating expense?

No. Debt service is excluded from operating expenses so that net operating income describes the property rather than the owner's financing. Two buyers with different loans compute identical NOI for the same building.

Are capital expenditures operating expenses?

No. Capital expenditures such as a new roof, HVAC replacement or a unit renovation are excluded from operating expenses, though most lenders deduct a normalized replacement reserve to approximate their long-run cost.

Operating Expenses (OpEx): definition

Globalbiz CRE Academy defines Operating Expenses (OpEx) as follows: Operating expenses are the recurring costs of running a commercial property (taxes, insurance, utilities, repairs, management and payroll) deducted from effective gross income to reach net operating income, and excluding debt service, capital expenditure, depreciation and income tax.

How it works

What belongs in operating expenses is defined by what NOI is for. NOI must describe the property independent of its owner, so any cost that varies with who owns the building is excluded. Debt service depends on the loan. Depreciation depends on the tax basis. Income tax depends on the owner's other affairs. Each is excluded not because it is unreal but because including it would make one property's NOI incomparable to another's.

Property taxes deserve particular attention because they are frequently the largest single expense and because they reset on sale in many jurisdictions. A property assessed years ago at a value far below today's price will be reassessed after a transaction, sometimes increasing the tax bill substantially. Underwriting the seller's historical tax line into a post-sale pro forma is one of the most expensive mistakes in commercial acquisition, and it is entirely avoidable by checking local reassessment practice.

Management fees are the classic normalization. An owner who self-manages reports no management expense, which inflates NOI by the amount of a fee that a purchaser will certainly pay. Underwriters add a market fee (typically 3% to 5% of EGI for multifamily, sometimes lower for single-tenant industrial) regardless of the seller's arrangement.

Replacement reserves sit on the boundary. Strictly they fund capital items rather than operations, and appraisers deduct them above the NOI line, which Fannie Mae's instructions to appraisers (Form 4827) call standard appraisal practice. Lenders almost always deduct one, because a roof will need replacing whether or not the seller set money aside, but below the NOI line, to reach net cash flow. Where a reserve is deducted, it should be stated explicitly, since a NOI computed with reserves and one computed without are not comparable.

Typical ranges

Typical operating expense components as a share of effective gross income, multifamily
Expense	Typical share of EGI	Note
Property taxes	10% – 20%	Often the largest line; may reset on sale.
Insurance	3% – 8%	Has risen sharply in catastrophe-exposed markets.
Repairs and maintenance	6% – 12%	Rises with building age and deferred maintenance.
Utilities (landlord-paid)	4% – 10%	Depends heavily on whether units are separately metered.
Management fee	3% – 5%	Underwritten whether or not actually paid.
Payroll	5% – 12%	On-site staffing; minimal in small properties.
Replacement reserve	$250 – $400 per unit	Deducted by most lenders below the NOI line, to reach net cash flow.

Common mistakes

Using the seller's property tax figure post-sale: Many jurisdictions reassess on transfer. The buyer's tax bill can be materially higher than the seller's from day one.
Omitting a management fee on a self-managed property: The next owner will pay it. Excluding it overstates NOI and, at a 6% cap rate, overstates value by roughly seventeen times the annual fee.
Treating a major repair as an operating expense: A roof replacement is capital expenditure. Running it through operating expenses understates NOI in that year and distorts the trailing statement.
Comparing expense ratios across lease structures: A triple-net property shows a 10% expense ratio and a gross-lease property 45% for the same building. The difference is who pays, not how it is run.

Frequently asked questions

What counts as an operating expense in commercial real estate?: Property taxes, insurance, utilities paid by the landlord, repairs and maintenance, property management fees, on-site payroll, marketing and administrative costs. Some conventions also count a replacement reserve; Fannie Mae and CMBS lenders deduct it below the NOI line instead.
Is mortgage interest an operating expense?: No. Debt service is excluded from operating expenses so that net operating income describes the property rather than the owner's financing. Two buyers with different loans compute identical NOI for the same building.
Are capital expenditures operating expenses?: No. Capital expenditures such as a new roof, HVAC replacement or a unit renovation are excluded from operating expenses, though most lenders deduct a normalized replacement reserve to approximate their long-run cost.