Encyclopedia
Operating costs
The costs of running a building, such as maintenance, insurance and management, often charged to tenants under a net lease.
For example: A tenant reviews the definition of operating costs before signing. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say your building needs a new roof and the landlord plans to share the full cost among tenants in a single year. Your lease defines operating costs as normal running expenses and spreads capital work over its useful life, so you pay a small yearly share instead of a large one-time bill.
What I’d tell a friend
Read the definition of operating costs line by line before you sign. The gap between running costs and capital replacements can be worth more over a lease than a small rent discount.
Why it matters to you
They often rise every year and land on tenants through additional rent. Leases that don't cap them or exclude capital items can leave you paying for the landlord's building upgrades.
How to use it in your deal
Tenants should ask for actual operating costs for the past two or three years, this year's budget, and the lease definition, then add them to basic rent to see your real cost.
Negotiate exclusions such as structural repairs, capital replacements (or only amortized portions), the landlord's financing and income taxes, leasing commissions, legal costs of disputes with other tenants, and costs covered by insurance or warranties. Ask for an audit right and timely reconciliations. Landlords should keep clear records, budget carefully and explain big changes before they hit.
Buyers should check that costs are actually recoverable under each lease, and look for unrecovered amounts that hurt net operating income (NOI, the income left after running costs). Owners can lower costs and keep tenants happy with good maintenance planning. Lenders look at whether operating costs are reasonable for the type and age of building.
Mistakes I see
Comparing basic rent only. Accepting capital costs without limits. Not auditing. Landlords billing late or without detail. Buyers assuming full recovery.
In BC and Vancouver
The lease controls; no BC statute sets what's recoverable. Property tax information comes from BC Assessment and municipal notices.
Official sources: CanLII (court decisions) · BC Assessment appeal guide
Running costs versus capital work
Operating costs usually cover the ongoing expense of running a building: cleaning, common-area utilities, routine repairs, landscaping, insurance and often property tax. Leases differ a lot on whether bigger replacements, like a roof or a heating system, belong in that pot.
If capital work is included, you can ask that it be spread over the item’s useful life, so you only pay for the years you benefit from it. You can also ask for specific exclusions, such as structural repairs or costs to fix original construction problems.
Exclusions worth asking about
Tenants commonly ask that operating costs leave out the landlord’s financing costs, leasing commissions, costs to prepare other tenants’ space, and repairs covered by insurance or warranties. Each one is a fair point to raise in the offer.
Ask too whether costs are grossed up when the building is partly empty. Grossing up can be fair, but it changes what you pay, so understand how it works before you agree to it.
Checking your statement this month
If you just got an additional rent or common area maintenance (CAM) statement or a year-end reconciliation, here is what I’d do with it:
- Find your share. Check the area the landlord used for you and for the whole building. Your share should match what the lease says.
- Ask for the backup. Request the year-end statement with a line-by-line breakdown and, for anything that jumped, the invoices behind it.
- Compare to last year. Line items that jump sharply deserve a question. So do new categories.
- Check the exclusions. Many leases exclude things like the landlord’s financing costs, leasing commissions, costs to fix construction defects, and capital work (or allow capital work only spread over its useful life). Look for any of those on your bill.
- Check the stop or base year. If your lease uses an expense stop or base year, you should pay only the increase above it, not the full amount.
- Check the gross-up and management fee. If the building was partly empty, see whether costs were grossed up and how. Check that the management or admin fee is the rate your lease allows, charged only on what it should be.
- Watch the deadline. Many leases give you a limited time to dispute a statement or ask to inspect the records. Read that clause first, and put your questions in writing before it runs out.
When to use audit rights: if the landlord’s answers don’t explain a large difference, or the same problem shows up year after year. Some leases make the landlord pay the audit cost if the overcharge is above a set percentage. Read your clause, and talk to a BC lawyer before you withhold anything.
Questions to ask before you sign
- What were actual costs last year?
- What's excluded?
- Are capital costs included?
- Can I audit?
- When do I get the year-end statement?
Keep reading
Related terms: Additional rent, CAM, Audit right
Working through this right now? Questions are free. Book a 15-minute call or call or text 604 256 2002, and I’ll give you a straight answer.
Back to the A–Z index · common questions · tactics to watch for · the shorter glossary
General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.