Industrial Property Operating Expenditures
Operating expenses, or OpEx, are incurred in the day-to-day operations of an industrial asset and are critical to understand as part of a commercial real estate investment strategy.
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In commercial real estate finance, operating expenditures, or OpEx, account for any ongoing costs incurred in the everyday operation and maintenance of the property. OpEx typically includes the small and frequent costs that property owners see regularly like utilities, payroll, maintenance, repairs, and rent. And, unlike the IRS’ stance on capital expenditures — which are investments made that prolong an asset’s economic lifespan — operational expenditures are fully tax-deductible in the year they are incurred.
Operating expenditures are directly related to another common term used in industrial investing: operating and maintenance expenses or O&M. O&M comprises costs such as utility installation charges and deposits, maintenance equipment purchases, property and liability insurance premiums, the purchase of office equipment and furniture, advertising expenses, management fees, and more. Any expenses that are considered to be O&M are also considered to be operational expenditures, but with a few exceptions. Neither taxes nor debt service falls under operational expenditures.
Operating expenditures are an unavoidable part of owning and operating a commercial property. And while OpEx investments may seem small when looked at individually, they can account for a significant portion of an industrial asset’s lifecycle costs. This is why many investors seek to reduce operating expenditures as much as possible without hurting or hindering the daily operations of assets as a means of gaining a competitive advantage in the market and increasing profits.
Related Questions
What are the most common operating expenditures for industrial properties?
The most common operating expenditures for industrial properties include utilities, payroll, maintenance, minor repairs, property taxes, office expenses, insurance, software expenses, contracts, and depreciation expenses. These expenses are necessary for the everyday operations of the property and are typically fully tax deductible for the year in which they are incurred.
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What are the differences between operating and capital expenditures for industrial properties?
The main difference between operating and capital expenditures for industrial properties is that capital expenditures are usually much larger purchases an entity makes to be used and provide value over the long term, while operating expenses (OPEX) include the day-to-day expenses a property incurs to keep it operational.
Some examples of CAPEX include physical assets, like buildings, equipment, machinery, and vehicles. These expenditures also include improvements to buildings and assets that will create longterm value or protect standing value. Examples of OPEX include more consistent recurring costs like rent, employee salaries, utilities, taxes, etc. Accounting and legal fees factor into operating expenditures as well, and so does interest paid on debts.
A key difference between capital expenditures and operating expenditures is that CapEx cannot be deducted from income for tax purposes while OpEx costs can be deducted.
For more information, please see this article and this article.
What are the tax implications of industrial property operating expenditures?
Industrial property operating expenditures are generally tax deductible. This includes expenses such as repairs and maintenance, employee wages, independent contractor costs, and professional fees. Larger changes to the property could qualify as capital improvements, and these would have to be depreciated over the course of several years. It is a good idea to take all of the various projects that fall into this category and itemize your expenses. It will be easier for you or your tax specialist when it comes time to file.
For more information, please see Federal Tax Implications for Commercial Real Estate in 2022.
What are the most important considerations when budgeting for industrial property operating expenditures?
When budgeting for industrial property operating expenditures, the most important considerations are the cost of utilities, taxes, insurance, and maintenance. Utilities can include electricity, water, and gas, and should be factored into the budget. Taxes can vary depending on the location of the property, and should be researched before investing. Insurance is also important to consider, as it can protect the property from any potential damages or liabilities. Finally, maintenance costs should be factored in, as they can include repairs, cleaning, and other upkeep costs.
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How can industrial property owners reduce operating expenditures?
Industrial property owners can reduce operating expenditures by implementing 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 property management costs, if a tenant can submit a maintenance request with a few taps. Replacing interior and exterior lighting with LED bulbs can also have a huge impact on lowering energy costs. Additionally, industrial property owners should not defer property maintenance, as cash flows may take a hit during a recession. If capital is not available to do the work now, small loans can be looked into.
What are the best strategies for managing industrial property operating expenditures?
The best strategies for managing industrial property operating expenditures include:
- Negotiating favorable terms with vendors and suppliers
- Implementing energy-efficient systems and equipment
- Reducing labor costs through automation and technology
- Optimizing tenant mix and rental rates
- Maintaining a preventative maintenance program
Negotiating favorable terms with vendors and suppliers can help you save money on operating costs. You should also consider implementing energy-efficient systems and equipment, as this can help reduce your energy bills. Additionally, reducing labor costs through automation and technology can help you save money on labor costs. Optimizing your tenant mix and rental rates can also help you maximize your income and reduce operating costs. Finally, maintaining a preventative maintenance program can help you reduce repair costs and extend the life of your equipment.
For more information, check out this article from CommercialRealEstate.Loans.