O&M: Operating and Maintenance Expenses in Commercial Real Estate

Operating and maintenance expenses associated with commercial real estate typically include property and liability insurance premiums, utility installation charges and deposits, maintenance equipment, purchase of office equipment and furniture, congregate items, advertising expenses, management fees, etc. (Source: www.commercialrealestate.loans/commercial-real-estate-glossary/operation-and-maintenance).

Operating expenditures, often abbreviated as OpEx, are ongoing costs incurred in the everyday business operations of a commercial property. These expenses can include utilities, wages, maintenance, repairs, marketing, accounting, and legal fees. (Source: www.commercialrealestate.loans/commercial-real-estate-glossary/operational-expenditures).

Operating and maintenance expenses (O&M) in commercial real estate refer to costs related to the day-to-day operations of a property, such as property and liability insurance premiums, utility installation charges and deposits, maintenance equipment, purchase of office equipment and furniture, congregate items, advertising expenses, management fees, etc. O&M can account for up to 50% of a building's lifecycle costs.

Operational expenditures (OpEx) in commercial real estate are a stark contrast to capital expenditures (CapEx), which are costs related to purchasing or upgrading tangible and intangible assets. These include the renovation of a property, expansions, equipment acquisitions, or smaller repairs that can extend the lifespan of the property. Another key difference between the two is that operating expenses are fully tax deductible for the year they are incurred, whereas capital expenditures are not incentivized.

One way to reduce operating and maintenance expenses in commercial real estate is to implement smart building technology. Smart technology can ensure heating or air conditioning systems are utilized only when necessary, lowering everyone’s energy costs. Other proptech can reduce your property management costs, if a tenant can tap a few buttons to submit a maintenance request. Besides what most people think of as “smart” technology, even something as seemingly minor as replacing interior and exterior lighting with LED bulbs can have a huge impact on lowering your property’s energy costs.

The most common operating and maintenance expenses in commercial real estate include property and liability insurance premiums, utility installation charges and deposits, maintenance equipment, purchase of office equipment and furniture, congregate items, advertising expenses, management fees, etc. (Source). Additionally, operational expenditures (OpEx) can include utilities, wages, maintenance, repairs, marketing, accounting, and legal fees. (Source).

Operating and maintenance expenses in commercial real estate can be deducted from income taxes in the year they are incurred. This includes costs to travel to and from a rental property, including hotel expenses and 50% of food and beverage costs. Investors may also deduct the cost real estate investment related seminars, conferences, conventions, and other similar education events.

However, general property improvements, such as renovations or new furnishings, cannot generally be taken as deductions in the year they are incurred. Instead, these must be depreciated over the regular life of the property.

Sources:

• Federal Tax Implications for Commercial Real Estate in 2022
• The Top 10 Tax Benefits of Investing in Commercial Real Estate

Budgeting for operating and maintenance expenses in commercial real estate requires due diligence in identifying sources of income and accounting for operating expenses. Common operating expenses to consider in NOI calculations are:

Instituting a rigorous O&M program not only greatly reduces work site risk and unplanned expenses due to operational faults, but also increases the longevity of real estate assets.