Rule Of Thumb Operating Expense for Retail Properties

[Sue T.]

Hi,

Is there a rule of thumb for operating expense ratio for retail (non NNN) properties? What if the owner is only responsible for roof and structure? Is there an "average" estimated vacancy loss that you use to estimate operating expenses?

Thanks.

[Tony Albanese]

Let me break this down into a few parts:

Roof, Parking Lot, Building Structure - generally, while the Landlord is responsible for actually maintaining these items, the COST of maintaining these items AND the COST of replacing these are put back into the CAM charges, and are not really an expense to the Landlord. Usually the cost of replacement of these "capital" items are amortized over the useful life of each for the purpose of CAM charges.

Lighting, Trash, etc. - These are almost always billed back to the Tenant(s) in CAM charges and are not a Landlord expense.

The big issue is vacancy. If you have vacancy than you are eating the CAM, Tax, and Insurance charges for the vacant space.

Typically I will look at the market vacancy rate for the area the center is in and use that in my proforma for a vacancy rate...both for calculating rental loss and for NNN losses.

You should also assume a 4% of NOI Managment Fee, some of which may be reimbursable through CAM, depends on the lease.

Also, watch for "controllable CAM caps" in the leases. Sophisticated tenants will have caps on annual CAM increases...these can kill your NOI.

Anything I missed?