Which item is NOT an operating expense in the appraisal sense?
Correct Answer
C) The mortgage payment on the existing loan
Why this is correct: Net Operating Income (NOI) is calculated before financing costs to allow comparison of property performance independent of ownership structure. Mortgage payments (debt service) are a financing cost, not an operating expense. Why the other choices are wrong: 'The annual insurance premium on the building' is a standard operating expense. 'A management fee, even where the owner self-manages' is an imputed operating expense. 'A reserve for replacing the roof on schedule' is a reserve expense included in NOI. Exam tip: Remember NOI = Potential Gross Income - Vacancy - Operating Expenses (including insurance, management, taxes, utilities, reserves). Debt service is after NOI.
Why This Is the Correct Answer
Why this is correct: Net Operating Income (NOI) is calculated before financing costs to allow comparison of property performance independent of ownership structure. Mortgage payments (debt service) are a financing cost, not an operating expense. Why the other choices are wrong: 'The annual insurance premium on the building' is a standard operating expense. 'A management fee, even where the owner self-manages' is an imputed operating expense. 'A reserve for replacing the roof on schedule' is a reserve expense included in NOI. Exam tip: Remember NOI = Potential Gross Income - Vacancy - Operating Expenses (including insurance, management, taxes, utilities, reserves). Debt service is after NOI.
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
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