Posted by Mike Langolf ● Dec 29, 2020 9:00:00 AM

What the Heck is a P&L Statement and NOI?

business people with documents

A P&L Statement, Profit and Loss Statement and Operating Statement all refer to the same document that lenders require for income producing real estate. In this post we are going to refer to the document as an operating statement. This document tells the story of how much cash your property is generating by looking at its income and expenses to calculate a property’s operating income and net operating income (NOI), which are not always equal. Confused – keep reading and let’s sort this out.

 

Operating Statement Basics

When a borrower fills out a generic operating statement (see example below), most likely there will be a line for actual rental income received, expenses, reimbursement and other income (i.e. late fees, parking fees, etc.) collected, which combined equals the property’s total income. Then there will be spaces to enter operating expenses, such as real estate taxes, property insurance, utilities, management fees, repairs and maintenance, professional fees and miscellaneous expenses. And then the operating income would be the total income minus the summation of the operating expenses. Note - In this article we will not address non-cash components that may be included in an operating statement for tax purposes.

Typical Operating Statement

Rental Income

 

$   100,000

Expense Reimbursement

 

$                 -  

Other Income

 

$         1,000

Total Income

 

$ 101,000

Real Estate Taxes

 

$       15,000

Property Insurance

 

$         4,800

Utilities

 

$         5,000

Management Fees

 

$         5,000

Repairs and Maintenance

 

$         2,000

Professional Fees (Legal and Accounting)

 

$             500

Misc. Expenses

 

$                 -  

Total Operating Expenses

32.0%

$     32,300

Operating Income

 

$     68,700

 

Net Operating Income (NOI) Basics

How is NOI different from operating income? NOI is simply Effective Gross Income (EGI) minus Operating Expenses (OpEx). The primary difference is how the calculation of the total income in the above example compared to the EGI in the example below. EGI takes the gross potential income plus other income minus vacancy and collection loss, whereas an operating statement usually only has a line item for the actual rental income.

 

Net Operating Income

Potential Gross Income

 

$   100,000

Other Income

 

$         1,000

Less: Vacancy and Collection Loss

10%

$       10,000

Effective Gross Income (EGI)

 

$     91,000

Real Estate Taxes

 

$       15,000

Property Insurance

 

$         4,800

Utilities

 

$         5,000

Management Fees

 

$         5,000

Repairs and Maintenance

 

$         2,000

Professional Fees (Legal and Accounting)

 

$             500

Misc. Expenses

 

$                 -  

Total Operating Expenses (OpEx)

35.5%

$     32,300

Net Operating Income (NOI)

 

$     58,700

 

As you can see, Vacancy and Collection Loss are not included in the generic operating statement but are required for the calculation of net operating income. It is assumed that at some point during the year for most properties there will be lease roll over and those costs associated with vacancy need to be included in the calculation, even if the property is 100% occupied. In the example above, we used 10% as the vacancy factor, but this will vary with local market conditions.

 

NOI and Operating Statements

At the end of the day, small balance commercial lenders are more interested in a property’s net operating income. It is extremely important because many underwriting metrics utilize net operating income in their formula. This includes Debt Service Coverage Ratio and Debt Yield.

And while technically not the same, many small balance commercial lender’s operating forms (including Visio’s) are designed to calculate a property’s net operating income.

Check in regularly to read more about SBC lending, and check out the "Small Balance Commercial" section of our blog. For more investor tools and resources, visit our Resources Page


To More Investor Resources

 

Topics: Real Estate Investing, Brokers, Small Balance Commercial