Commercial Real Estate Financial Statements & Valuation Methods

What does the income statement show?

A property's performance over a period, usually a year.

What is the first line item in the income statement?

Gross potential rent.

What does vacancy & credit loss represent in the income statement?

Empty units and tenants who don't pay.

What is effective gross income (EGI)?

Total revenue after accounting for vacancy and credit loss.

How is net operating income (NOI) calculated?

EGI minus operating expenses.

What does the cash flow statement start with?

Net income from the income statement.

What is the purpose of depreciation in the cash flow statement?

It is added back because it is a non-cash expense.

What does capital expenditures (capex) refer to?

Investments in property improvements like roofs and renovations.

What does the balance sheet represent?

A snapshot at one point in time, showing assets, liabilities, and equity.

What is the accounting equation represented in the balance sheet?

Assets = Liabilities + Equity.

How does net income affect the balance sheet?

It adds to retained earnings in equity.

What are the three approaches to property valuation?

Income approach, sales comparison, and cost approach.

What is the formula for the income approach using direct capitalization?

Value = stabilized NOI ÷ cap rate.

When is the discounted cash flow (DCF) method used?

When income will change over a hold period of 5-10 years.

What is the cost approach in property valuation?

Land value plus cost to rebuild today minus depreciation.

What are the three types of depreciation in the cost approach?

Physical, functional, and external depreciation.

What is the difference between property taxes and income taxes?

Property taxes are an operating expense above NOI; income taxes are below NOI.

What is the significance of interest in the income statement?

Interest is recorded on the income statement; principal is only in cash flow.

What should be added back in the cash flow statement?

Depreciation, because it is a non-cash expense.

What is a common mix-up regarding security deposits?

They are a liability, not income.

What does capex not include?

Capex is not considered an operating expense and is not included in NOI.

What does the net change in cash update?

It updates cash on the balance sheet.

What does the cash flow statement end with?

The net change in cash.

What is the relationship between net income and cash flow?

Net income flows to the top of the cash flow statement.

What happens to accumulated depreciation on the balance sheet?

It is subtracted from the property's value.

What does the cash flow statement account for in financing?

Loan proceeds and principal repayments.