An owner's statement shows annual EGI of $96,000 and these property expenses: taxes $11,000, insurance $4,000, utilities $8,500, routine maintenance $7,000 and management $4,800. The appraiser measures NOI after an additional $2,700 reserve. The owner's mortgage payments of $31,000 are excluded. What is the NOI after the reserve?
Correct Answer
B) $58,000
96000−11000−4000−8500−7000−4800−2700 = 58000. Common errors: leaving out the $2,700 reserve gives $60,700; deducting the mortgage payments as an operating expense gives $27,000; leaving out the management expense gives $62,800.
Why This Is the Correct Answer
Option B is correct because $96,000 − $11,000 − $4,000 − $8,500 − $7,000 − $4,800 − $2,700 = $58,000. All listed property expenses and the $2,700 reserve are deducted, and the $31,000 of mortgage payments is excluded because NOI is measured before debt service.
Why the Other Options Are Wrong
Option A: $27,000
Option A, $27,000, deducts the mortgage payments as an operating expense: $58,000 − $31,000 = $27,000. Debt service is a financing cost and is excluded from NOI, so the correct figure is $58,000.
Option C: $60,700
Option C, $60,700, leaves out the $2,700 reserve: $96,000 − $11,000 − $4,000 − $8,500 − $7,000 − $4,800 = $60,700. NOI is measured after the reserve, so subtracting $2,700 gives $58,000.
Option D: $62,800
Option D, $62,800, leaves out the $4,800 management expense: $96,000 − $11,000 − $4,000 − $8,500 − $7,000 − $2,700 = $62,800. Management is an operating expense and must be deducted, giving $58,000.
NOI Stops Before the Lender
Deduct every cost of running the property, including management and reserves, but stop before the mortgage payment.
How to use: Use this to decide which listed items belong in NOI and which, like debt service, do not.
Exam Tip
List every expense in the stem and cross each off as you subtract it; questions often hide an omitted item such as management or a reserve.
Common Mistakes to Avoid
- -Deducting mortgage payments as an operating expense
- -Omitting management when the owner self-manages
- -Forgetting the replacement reserve when the convention includes it
Concept Deep Dive
Analysis
This question tests calculating NOI from EGI by subtracting every listed operating expense plus the reserve, while excluding debt service. Each distractor omits one required deduction or adds the mortgage payments, which are a financing cost rather than an operating expense.
Background Knowledge
NOI is effective gross income less operating expenses, which include fixed expenses such as taxes and insurance, variable expenses such as utilities, maintenance and management, and replacement reserves when the convention includes them. Debt service is excluded because NOI measures property income before financing.
Real-World Application
An appraiser reviewing an owner's statement for a fourplex sees the mortgage payment listed among expenses. The appraiser removes it, adds a management fee the owner did not charge, includes a replacement reserve, and calculates NOI on a typical basis.
More Income Approach Questions
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An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
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Previous Question
Insurance premiums for comparable apartment properties have risen sharply this year, and current quotes indicate the higher level will persist. How should insurance be treated in the stabilized operating expense projection?
Next Question
An appraiser is extracting an overall rate from the $1,500,000 cash sale of an apartment building. The seller managed the property and reports income of $129,000 after all paid operating expenses. Market management for similar properties is $9,000 per year, buyers in this market deduct a $6,000 replacement reserve, and the seller's mortgage payments were $70,000. What overall rate does this sale indicate?