Commercial Lease Operating Expenses: What Should Never Be in CAM (2026)

3–5%

Standard management fee cap

20–30%

% of opex disputes involving excluded costs

1 year

Typical audit rights window after reconciliation

Why Operating Expense Exclusions Matter

In a NNN or modified gross commercial lease, you pay your proportionate share of the building's operating expenses in addition to base rent. The definition of "operating expenses" or "CAM charges" determines what you're paying for — and in a landlord-favorable lease, that definition can be incredibly broad.

The key insight is this: the operating expense definition is negotiable. Many tenants — especially smaller businesses without experienced advisors — sign leases with minimal exclusions and end up paying for costs that should never be their responsibility. Over a 5–10 year lease, these improperly included costs can add up to tens or hundreds of thousands of dollars.

Understanding the standard exclusions and how to negotiate them is one of the highest-value lease negotiation skills you can have.

Quick Note on Terminology: "Operating expenses," "CAM charges," and "building expenses" are often used interchangeably in commercial leases, though they have technical differences in some contexts. This guide uses them broadly to mean all pass-through costs beyond base rent. The exclusions discussed here apply to all of them.

Category 1: Capital Expenditures and Repairs

This is the most contested category in operating expense disputes. The general rule is that capital expenditures should not be current operating expenses — they should either be excluded entirely or amortized over their useful life.

What Counts as Capital vs. Operating?

Item	Operating Expense?	Rationale
Routine HVAC maintenance (filters, tune-ups)	Yes — include	Recurring maintenance; no multi-year benefit
HVAC unit replacement	No — exclude or amortize	Capital asset with 15–20 year useful life
Parking lot patching	Yes — include	Routine maintenance
Full parking lot resurfacing	Amortize only	Capital improvement; benefit over 10+ years
Roof repairs (patching)	Yes — include	Maintenance
Full roof replacement	No — exclude or amortize	Capital replacement; 20–30 year life
Elevator maintenance contract	Yes — include	Routine maintenance
Elevator modernization / replacement	No — exclude or amortize	Capital improvement; 20+ year life
Window cleaning	Yes — include	Routine maintenance
Window replacement (building-wide)	No — exclude or amortize	Capital improvement

The Amortization Solution

A practical middle-ground: allow capital items to be included in operating expenses only as amortized annual costs over the useful life of the improvement, at a commercially reasonable interest rate. This is fair to both parties — the landlord recovers the cost, but you pay it ratably over the period you benefit.

Negotiate: "Capital expenditures (items that would be capitalized under GAAP) shall be excluded from Operating Expenses except to the extent such costs are amortized on a straight-line basis over the useful life of the applicable improvement (as determined in accordance with GAAP), and only the annual amortization amount shall be included in Operating Expenses for the applicable year."

⚠️ Watch for "Cost-Saving Capital": Some landlords will include capital improvements that are claimed to reduce operating costs — e.g., a new energy-efficient HVAC system that "saves" on utility costs. Many leases allow these to be included in CAM on an amortized basis. This can be reasonable, but negotiate a cap: tenant's share of the amortized cost should not exceed the actual savings attributable to the improvement.

Category 2: Management Fee Caps

Property management fees are a legitimate operating expense — the building has to be managed, and that costs money. The problem is that without a cap, the management fee can become a profit center for the landlord.

Why Caps Are Critical

If a building owner uses an affiliated management company, there's an inherent conflict of interest. The landlord can set any management fee rate they want and pass it through to tenants. In a building with $2 million in annual rent, an uncapped management fee at 8% would be $160,000 — far above the market rate of 3–4%.

Market standard management fee caps:

Office buildings: 3–4% of gross collected rents
Retail centers: 4–5% of gross collected rents
Industrial: 2–3% of gross collected rents

Always negotiate a specific percentage cap. Also ensure the cap applies to gross collected rents (actual rent received), not gross potential rent (which would be higher in a building with vacancies).

Reasonable vs. Unreasonable Management Fee Language

Language	Assessment
"Management fees in such amounts as Landlord shall determine"	Landlord-favorable — no cap, fight this
"Management fees not to exceed 5% of gross revenues"	Better — has a cap but uses revenues (not collected rents)
"Management fees not to exceed 3% of gross collected rents"	Tenant-favorable — capped at collected amounts
"Actual management fees paid to an unaffiliated third-party manager, not to exceed 3% of gross collected rents"	Best — arm's-length requirement plus cap

Category 3: Leasing Commissions and Related Costs

Leasing commissions are the fees paid to brokers to find new tenants. These are unambiguously landlord costs — they benefit the landlord's investment by filling vacancies — and should never be included in operating expenses.

Despite this, some leases include leasing commissions in the operating expense definition, especially in aggressive landlord-form leases that haven't been carefully reviewed. Always exclude:

Leasing commissions paid to tenant's brokers or landlord's brokers
Legal fees for negotiating new leases or renewals
Advertising and marketing costs to attract new tenants
Costs of renovating space for new tenants (TI allowances)
Costs of free rent periods or other tenant concessions for new tenants

🚨 Don't Miss This: Some leases include "costs of operating and maintaining the building" which could be construed broadly enough to include tenant attraction costs. The specific exclusion list in the operating expense definition is your protection. Don't rely on general language — list each category explicitly.

Category 4: Landlord Financing and Investment Costs

The landlord's financing costs — the mortgage on the building — are the landlord's investment obligations. They have nothing to do with operating the building and should always be excluded:

Mortgage principal and interest payments
Loan origination, closing, and refinancing fees
Ground rent (if the landlord leases the land under the building)
Debt service costs on any financing related to the building
Depreciation of the building shell or original structure
Amortization of financing costs
Costs of syndicating ownership or raising equity

Category 5: Landlord-Only Benefits and Non-Building Costs

A significant source of improper charges in CAM reconciliations is costs that don't benefit the building as a whole — or benefit only the landlord or specific tenants:

Excluded Cost	Why It Doesn't Belong in CAM
Costs of vacant space (beyond reasonable maintenance)	Vacancy risk belongs to the landlord, not tenants
Costs of other buildings in the landlord's portfolio	Only the subject building's expenses should be allocated
Corporate overhead of landlord or management company	Administrative overhead not related to property management
Income taxes on landlord's income	Tax on landlord's investment returns, not operating cost
Costs of landlord's employees not related to the building	Includes executive salaries, HR, accounting for landlord entity
Costs to cure landlord's pre-existing lease violations	Landlord's liability, not operating cost
Costs relating to hazardous materials in the building pre-dating tenant	Environmental remediation is a landlord liability
Fines, penalties, and judgments against the landlord	Results of landlord's conduct, not operating cost
Excess insurance (above commercially reasonable coverage)	Only reasonable insurance should be included
Costs specifically charged to and paid by other tenants	Double-dipping — costs already recovered elsewhere

Category 6: Gross-Up Abuse

The gross-up provision adjusts variable operating expenses to reflect what they would be at full (95% or 100%) occupancy. This is intended to protect landlords from low base-year expenses in a partially-occupied building — fair enough.

The problem: some leases allow gross-up of all operating expenses, including fixed costs that don't vary with occupancy. Gross-up should only apply to variable costs that actually scale with occupancy (utilities, janitorial, some staffing).

Fixed costs that should not be grossed up:

Real estate taxes (they don't change based on occupancy)
Property insurance
Structural maintenance and repairs
Landscaping and exterior maintenance
Management fees (already capped as a percentage)

The Negotiation List: Your Complete Exclusion Checklist

Use this as a starting point when negotiating the operating expense definition in any NNN or modified gross commercial lease:

Capital expenditures (or alternatively: amortized capital only, over useful life)
Mortgage principal, interest, and financing costs
Depreciation of building structure and major systems
Leasing commissions (all, including tenant rep and landlord rep)
Legal fees for lease negotiations (new leases, renewals, and amendments)
Marketing and advertising costs to attract new tenants
TI allowances and tenant concessions for new or renewing tenants
Management fees above 3–4% of gross collected rents
Costs not attributable to the operation of the specific building
Costs of vacant spaces in excess of reasonable maintenance
Landlord's income taxes, franchise taxes, or estate taxes
Costs caused by landlord's negligence, willful misconduct, or legal violations
Environmental remediation costs for pre-existing conditions
Fines, penalties, and legal judgments against landlord
Corporate overhead and administrative costs of the landlord entity
Costs already directly reimbursed by other tenants
Insurance premiums exceeding commercially reasonable coverage levels
Ground rent payments (if applicable)
Gross-up of fixed (non-variable) expenses
Audit rights: right to audit operating expense records within 1 year of reconciliation

Frequently Asked Questions

What are operating expense exclusions in a commercial lease?

Operating expense exclusions are costs that the landlord agrees will not be included in the CAM or operating expense pool passed through to tenants. Common exclusions include capital expenditures, management fees above a capped percentage, leasing commissions, mortgage interest, depreciation of building shell, and costs benefiting only certain tenants.

Should capital repairs be excluded from CAM?

Yes. Major capital repairs and replacements (roof replacement, HVAC system replacement, structural repairs, elevator modernization) should be excluded from operating expenses. These are long-lived improvements that benefit the building over many years and should be amortized at most — not expensed entirely in the year incurred. Tenants often negotiate that capital items may only be included in CAM as amortized annual costs over the useful life of the improvement.

What is a management fee cap in a commercial lease?

A management fee cap limits the property management fee that can be included in operating expenses. Standard caps are 3–5% of gross collected rents. Without a cap, landlords could charge any management fee (even to an affiliated management company) and pass it through to tenants. Tenants should always negotiate a specific percentage cap on management fees in the operating expense definition.

Are leasing commissions an operating expense in NNN leases?

No — leasing commissions should never be included in operating expenses. Leasing commissions are costs of finding new tenants and are capital in nature; they benefit the landlord's investment, not the ongoing operation of the building. Always negotiate a specific exclusion of leasing commissions from the operating expense definition.

What is a gross-up provision in commercial lease operating expenses?

A gross-up provision adjusts variable operating expenses (primarily utilities and janitorial) to reflect what those expenses would be if the building were 95% or 100% occupied. This prevents tenants from artificially low base-year expenses that would result in large expense increases when occupancy rises. Tenants should ensure gross-up only applies to variable expenses, not fixed costs.

Can a landlord include mortgage interest in operating expenses?

No. Mortgage interest, principal payments, and financing costs are the landlord's investment obligations, not building operating costs. They should always be specifically excluded from the operating expense definition. The same applies to depreciation of the building shell and any financing fees or refinancing costs.

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