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Operating Expense Ratio article

How is the Operating Expense Ratio calculated for commercial real estate investments and developments? What are the factors that the Operating Expense Ratio takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Operating Expense Ratio useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.

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Video Title: Learn about the Operating Expense Ratio

Video Publication_Date: Saturday, December 24, 2016

Video Duration: 0:39

Video Description:
The topic for this commercial real estate investment analysis video is Operating Expense Ratio. Throughout the video planEASe Software is used to illustrate Operating Expense Ratio. The video does not use the current Proforma Example, but all the factors that the Operating Expense Ratio are sensitive to are covered.

201020112012201320142015
Total Gross Income$365,472$372,443$370,410$376,040$384,217$414,321
Total Operating Expenses$69,400$71,244$73,141$75,094$77,103$79,170
Operating Expense Ratio19.0%19.1%19.7%20.0%20.1%19.1%

In this case the 2011 Capitalization Rate was calculated by:

2011 Total Operating Expenses$71,244
divide by 2011 Total Gross Income$372,443
equals the 2011 Capitalization Rate19.1%


Considers:
  • Expenses and Gross Income (Potential)
Ignores:
  • Vacancy, Time Value of Money, Sale Proceeds, All Financing (Loans), Other Years NOI, All Taxes

    ... and a lot of other things
Why is Operating Expense Ratio useful?

Operating Expense Ratio is the Total Operating Expenses divided by the Gross Income, which tests the reality of the total expense amount, as well as the expense growth rate. Note that this ratio is better presented in the Common Size report which shows the same ratio for each of the individual expenses as well as the total.

What is the Operating Expense Ratio Sensitive to:

Anything related to Expenses and Gross Income (Potential) in the current year

The Operating Expense Ratio is shown in these planEASe Reports:

Written by
Michael Feakins, CCIM
of planEASe Software