Operating Expenses
Synonyms: OPEX، Operating Costs، Running Costs، Operations Expenses
Last updated: 2026-05-07
Short Definition
Daily property operation costs like maintenance, utilities, management, and insurance, deducted from revenue to calculate net income.
Overview
Legal Basis
Operating Expenses are based on accounting standards adopted by SOCPA and IFRS standards applied in Saudi Arabia, which specify what is considered operating versus capital expense. They are also subject to the Value Added Tax Law issued by Royal Decree No. (M/113) of 1438 AH, where VAT paid on expenses can be deducted (Input VAT) for tax-registered commercial property. ZATCA requires documenting all expenses with electronic tax invoices in the Fatoorah system to be deductible.
Practical Example
Mastery Management office manages an office tower in Khobar consisting of 24 offices, total annual revenues of SAR 1,800,000. Operating expenses are distributed as follows: broker commissions (contract renewals) SAR 60,000, owner management fees to office (8%) SAR 144,000, periodic maintenance and elevators SAR 95,000, utility bills for common areas SAR 72,000, security and safety SAR 84,000, property insurance SAR 18,000, daily cleaning SAR 96,000, vacant office marketing SAR 24,000, accounting and audit fees SAR 15,000, municipal licenses SAR 8,000, VAT on expenses SAR 65,000 (deductible). Total operating expenses: SAR 681,000. Operating expense ratio: 681,000/1,800,000 = 37.8% (within ideal range for commercial property). Net Operating Income = 1,800,000 - 681,000 = SAR 1,119,000. These analyses enable the owner to evaluate management office performance and control expenses.
Common Mistakes
- ✗Mixing operating with capital expenses — major renovation is not an operating expense; treated accounting-wise by depreciation over years.
- ✗Neglecting documentation of small recurring expenses — with time become large amounts uncalculated in net income.
- ✗Assuming operating expense stability annually — reality changes (inflation, emergency breakdowns, periodic major maintenance).
- ✗Overlooking Input VAT deduction for tax-registered commercial property — the owner loses a tax right reaching thousands of riyals annually.
- ✗Not comparing expenses with planned budget — misses the opportunity to early detect leaks or mismanagement.
International Differences
Operating expenses concept is global and largely unified, with differences in details. In the UAE, includes Service Charges estimated by Mollak, with rates 30-45%. In Turkey, operating expenses are relatively higher (40-55%) due to inflation and maintenance costs. In Egypt, expenses are hard to control due to high inflation. In the UK, Operating Expenses include Service Charges, Ground Rent, Insurance, with rates 20-35% residential. In the US, OpEx is an industry standard, calculated precisely, with rates similar to Saudi. The Saudi advantage in operating expenses is moderation of Service Charges ratio compared to Gulf, low VAT (only 15%), absence of personal income tax, and ZATCA integration for smooth tax deduction on expenses, making net income in Saudi relatively higher than most competitive markets.