Commercial Real Estate beginning course

pro forma statement.

Generally used by prospective purchasers/investors as a means of forecasting the property's performance or determing it's value.

A capital improvement is ?If you find a property that has not had any maintenance expenses in the recent past, you will probably find a tradeoff in the overall condition of the property.

any improvement that substantially increases the value or useful life of the property.

Included in gross scheduled income would be _____ These sources could include ?

any income attributable to the property from non-rent sources. income from laundry, vending machines, parking and storage fees, as well as other owner-operated concessions.

The total operating expenses are now _____ from the effective gross income: The total you get is the ?

subtracted Net operating income

Repairs and maintenance are considered what type of expense?

variable expense

A list of typical fixed expense categories includes the following: ?

• Ad valorem property taxes • Insurance • Landscaping and service contracts

Total operating expenses is the ?

total of the expenses calculated, not including vacancy or credit losses. Remember that we are attempting to give as accurate a picture as possible of the property's financial condition. The property's value will be dependent on the ability to produce income, so it is important to be as accurate as possible in estimating both income and expenses.

What is the formula for Annual Property Operating Data (APOD)?

(Gross Scheduled Income (gsi) - vacancy and collection losses = Effective Gross Income) - (Operating Expenses, including fixed expenses + variable expenses + reserves for replacement = N.O.I. Net Operating Income

It is important to carefully analyze all categories of expenses in order to accurately portray the financial condition of the property. There are different categories of expenses depending on the type of property you will be analyzing. However, all expenses are segregated into three basic categories: ?

1. Fixed expenses 2. Variable expenses 3. Reserves for replacement

Operating statements for real estate investments follow a very specific format, most often utilizing a form called the ?

Annual Property Operating Data (APOD):

Whenever there is an employee, there are various taxes for which the employer is responsible. Among these are ? These taxes are payable by the employer, and, in turn, the employer is required to withhold some amount from the employees' pay and forward it to IRS. Failure to report or file in a timely fashion will subject the employer to fines and penalties.

Social Security taxes, unemployment tax, and local, state, and federal income taxes.

define Contract services?

These are services that are supplied by outside vendors not already accounted for under fixed expense categories, such as a security patrol, maintenance contracts, design services, appraisals, and many others.

Miscellaneous is also considered a variable expense and should always be a category for those expenses too insignificant to warrant their own category. Any additional expenses that were not accounted for elsewhere in the analysis can ?

also be included.

Accounting and legal is considered a variable expense. Accounting and legal expenses cover the amount for the bookkeeping required on the property. It will include any ?

amounts paid for payroll reporting or for monthly profit and loss statements. This should also include any legal expenses associated with evictions, drafting of leases, and so on.

When analyzing a real estate investment, the place to begin is with _______, also known as a ______statement.

an existing operating statement, profit and loss

Repairs and maintenance This covers the total amount of repairs and maintenance required for the year, not including ?

any money spent on capital improvements.

The reserves for replacement category is for _____ This "expense" will help the investor to understand the effect on cash flow of anticipated replacement of major components of the building. This expense will be ignored, or added back for any after-tax cash flow analysis, because these items are usually treated as ______

cash flow analysis purposes. capital improvements for tax purposes instead of deductible expenses.

Advertising, licenses, and permits are considered a variable expense. Many larger properties will have ongoing advertising expenses. At the very least, there will be some cost at each vacancy. The amount spent for advertising, as well as any license or permit charges such as ?

city business licenses, pool inspections, and code inspections, is included here.

When analyzing the gross income, consideration is given not only to the existing rents being charged, called contract rent, but also ?

economic rent, which is the rent the property would command if it were available for rent in the current market.

The net income that a property is capable of producing The net income that a property is capable of producing will be one of the first indicators of the worth of an investment. Later when we begin to apply the capitalization rate to the property, this net operating income (NOI) will be used to ?

estimate total investment value.

Many properties will be managed completely by offsite personnel. The amount for off-site management is determined and subtracted as an ______. It should be noted that a management expense is a valid deduction from income even if the owner is managing the property. There are many firms specializing in this field that usually charge between _______ of the rental amount.

expense of operation. 5 percent and 10 percent

The operating report consists of both ?

income and expense items attributable to the property.

utilities are considered a variable expense. This is probably the most difficult portion of the operating statement to complete accurately. This information is most easily obtained from the owner; however, you can usually acquire a printout from each utility supplier showing the historic cost of utilities on a particular property. The supplier may be willing to give you some indication of the anticipated cost in the coming year. This information is subject to many variables, such as ?

increase in service cost, tenant use of the utilities, appliance efficiency and repair, and the possibility of a sustained water or gas leak that could dramatically affect utility cost.

gross scheduled income includes ?

management costs such as office and administrative expenses or performance bonuses paid to an on-site manager. Any health insurance or retirement plan contributions would also be listed here.

When talking about fixed expenses, be careful to consider that these expenses may not be the same for a ____; for example, the building insurance may go up or the real estate may be reassessed upon transfer.

new owner

Real estate leasing commissions This category should always be considered, particularly in ______ Each time the property is vacant, a new tenant will have to be found. This is often done through a _____

nonresidential property. leasing agent who will charge a fee for his or her services.

NOTE: If the owner is paying the utility bills and is then reimbursed by the tenant, the full utility cost will be listed here and the amount reimbursed to the owner would be listed as ______

other income.

Supplies are considered a Variable Expense. This might include ?

supplies for the vendors mentioned previously, bug spray, batteries for smoke detectors, deicer for drives and walks, and so on.

The gross scheduled income is ?

the amount of money that the property would produce on an annual basis if it were fully occupied.

On-site or resident management is used when the day-to-day activities of the property require constant supervision. A resident manager is sometimes given free or reduced rent. If that is the case, you must include ?

the manager's unit rent in gross scheduled income and then enter the amount of free rent as an expense. In many types of property, this category will include security and maintenance personnel.