Which item is properly excluded when computing net operating income?
Correct Answer
B) Mortgage debt service on the existing loan
Why this is correct: Net Operating Income (NOI) reflects the property's operating performance independent of ownership or financing. Mortgage debt service is a financing cost, not an operating expense, and is excluded from NOI. Why the other choices are wrong: "The annual property insurance premium" is an operating expense included in NOI. "A reserve allowance for roof replacement" is a reserve for replacements, an operating expense included in NOI. "The off-site management company's fee" is an operating expense included in NOI. Exam tip: NOI excludes financing costs (debt service) and owner's income taxes.
Why This Is the Correct Answer
Why this is correct: Net Operating Income (NOI) reflects the property's operating performance independent of ownership or financing. Mortgage debt service is a financing cost, not an operating expense, and is excluded from NOI. Why the other choices are wrong: "The annual property insurance premium" is an operating expense included in NOI. "A reserve allowance for roof replacement" is a reserve for replacements, an operating expense included in NOI. "The off-site management company's fee" is an operating expense included in NOI. Exam tip: NOI excludes financing costs (debt service) and owner's income taxes.
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An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will: