Operating Expenses

Expenses generally fall into three categories; fixed expenses, variable expenses and replacement reserves.  Fixed expenses do not change with changes in occupancy and have to be paid regardless of whether the property is occupied or not.  An example of a fixed expense is property taxes.  Property taxes will remain at the same level whether you have one or one hundred tenants.

Variable expenses do vary with changes in occupancy, thus they usually increase as occupancy increases.  An example of a variable expense is the cost of utilities.  With only a few tenants in a 12-unit building utility expenses are very low, but when you have 100% occupancy, utility costs go up dramatically.

Reserves for replacement are funds set aside for the periodic replacement of building components.  Some items within a building wear out faster than the building itself.  An example of a building component that wears out is the air conditioning units.  They may last 10 years or 15 years, but they don't have the 45 year to 55 year life expectancy of a building.  The replacement set-aside for reserves is generally established by other market sales.

Each property type, like medical office buildings, has a typical expense profile.  Market data often reveals what is typical for the property type.  

Contact us with your questions or concerns about operating expenses or regarding your specific appraisal assignment in Nevada at 1-702-568-6699.  We can also be e-mailed at grigdon@cox.net.  

Commercial Real Estate Appraisals in the Las Vegas & Henderson, Nevada Area.