Oct 29, 2014

Are Your Operating Expenses Assets or Liabilities?

By Don Catalano



If you ask any accountant, they will tell you without even thinking that operating expenses are a liability. When you sign a lease and you commit yourself to making payments of rent and operating expense reimbursements, you've taken on a liability. However, inside the liability that comes from the OpEx that you're already paying, an asset might be hiding.

Are Your Operating Expenses Normal?

This seemingly simple question isn't as easy to answer as it might first appear. First, you have to define normal. Is it that you're paying an amount that is commensurate with what you've been paying in the same space in the past, or is it that you're paying an amount that is inline with what other tenants pay in other buildings? If the answer to either is "no," it's time to start exploring. You can also consider doing some research if you don't have the tools or information to even answer the question.

Tracking Fluctuating Same-Space Expenses

If you have facilities management software or real estate optimization software, tracking the operating expenses you pay over time for a specific space is relatively simple. Usually, the software will output a chart or graph that lets you quickly see if there are spikes or unexpected fluctuations in each separate expense line. Having gas costs go up in winter due to higher heating use, but having water costs go up probably is a sign of a deeper problem. If you don't have portfolio management software, you will need to go back to the statements and reconciliations that you receive from your landlord.

Abnormal expense fluctuations are almost always a sign of bad management or of maintenance issues. If you can find and fix them, either by doing your own repairs or by working with and auditing your owner or his manager, you can bring those expenses back down. Reducing your liabilities in this way has almost the same impact as increasing your company's asset base.

Benchmarking to Market

Comparing your operating expenses to market norms is much more challenging if you don't have a broad portfolio all located in the same area. Usually, detailed operating expense data is hard to get. Generally, you either need a highly specialized program, like REoptimizer®, or you need access to high-cost third-party data services. However, if you license that information, you can see what you are paying relative to what other tenants pay. If your expenses are above market, you can use that to either work with your landlord to make adjustments in the building or to look into moving into a new space when your lease rolls. In either case, the potential savings that could be in your operating expenses are a de facto asset for your company.

The Happy Side of Operating Expenses

Finally, realize that all of your occupancy costs -- rent and operating expenses -- should be an investment in the productivity and profitability. Great people need great places to work, and great products need great locations where the buying public can interact with them and purchase them. When you look at all of your real estate expenses this way, you start to identify sites not based on which costs the least but, instead, on which can generate the most net revenue for your company moving forward.

Similar articles on Operating Expenses:

Managing Operating Expenses

Must-Use Resources for Benchmarking Operating Expenses

3 Strategies that Generate Cash for Pesky Operating Expenses

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Don Catalano

Don Catalano