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: Wednesday, October 15, 2025
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.
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| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| 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 Ratio | 19.0% | 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 Rate | 19.1% |
How is the Lender Yield calculated?
The Rate of Return (IRR or MIRR, depending on the Model being used) on the Total Debt Service for the property or investment. It is computed by reversing the sign of the Debt Service (to look at it from the Lender's perspective, where the draw is an outflow and the debt service and repay are inflows) and computing returns as normal on these reversed cash flows.
Written by
Michael Feakins, CCIM
of planEASe Software