Ch 16 Flashcards
Gross income is defined as:
“Total income from a property before deducting any expenses, customarily stated on an annual basis.”
Net Operating Income (NOI) is defined as:
“The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization).”
Formel to estimate market value with NOI:
The standard formula says V = I / R,
or
Value equals Income divided by a Rate.
Let’s look at the formula again: V = I / R
The Value in the formula is market value.
The Income is net operating income.
The Rate is a capitalization rate.
Potential gross income (PGI)
“The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.”
Vacancy and collection loss is defined as:
“A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss.”
Effective gross income (EGI) is defined as
“The anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income.”
Operating expenses are defined as:
“The periodic expenditures necessary to maintain the real estate and continue production of the effective gross income, assuming prudent and competent management. See also total operating expenses.”
Total operating expenses
“The sum of all fixed and variable operating expenses and the replacement allowance cited in the appraiser’s operating expense estimate.”
Replacement allowance (replacement reserves)
“An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building’s economic life; sometimes referred to as reserves or reserves for replacement.”
To find net operating income, we complete the following steps:
Gross Annual Rental (Potential Gross Income)
+ Other Income
- Vacancy/Credit Loss
= Effective Gross Income
- Operating Expenses
= Net Operating Income
Define Operating income
“Income derived from the operation of a business or real estate; indicates a stage in the profit-and-loss account where all direct costs and income from the operation have been taken into account; as distinguished from net profit or cash flow.”
