1215

The portfolio manager of a large real estate investment trust (REIT) has identified an office building as a potential investment. Based upon the following data, what is its net operating income (NOI)?

Gross potential rental income	$235,000
Estimated vacancy and collection loss rate	6%
Insurance and taxes	$15,000
Repairs and maintenance	$17,000
Utilities	$12,500
Cost of equity	11%

A) $150,550.

B) $190,500.

C) $176,400.

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The NOI is $235,000 – ($235,000 × 6%) ? $15,000 ? $17,000 ? $12,500 = $176,400. The cost of equity number is not needed, because the NOI calculation is independent of any financing arrangements.

1215

Net operating income (NOI) is calculated by subtracting which of the following from the property's gross potential rental income?

A) Depreciation.

B) Property taxes.

C) Income taxes.

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NOI does not consider income taxes, financing charges, or depreciation.

1215

All of the following variables might be factors when calculating the net operating income (NOI) for a property EXCEPT:

A) collection losses.

B) insurance.

C) depreciation.

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Insurance expenses and collection losses for a property are all factors in the NOI calculation. Depreciation is not a factor when calculating NOI because a basic, underlying assumption is that routine repairs and maintenance will keep the property in its existing condition.

1215

An investor is considering purchasing an office building that is currently 95% leased.

Gross potential rental income	$105,000
Insurance and taxes	$9,000
Repairs and maintenance	$15,000
Depreciation	$11,000

What is the building's net operating income (NOI), based on the above table?

A) $64,750.

B) $81,000.

C) $75,750.

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NOI can be calculated as gross rental income minus vacancy losses, insurance and taxes, and repairs and maintenance. Depreciation is not a factor in calculating NOI. NOI for the building is $105,000 – ($105,000 × 5%) - $9,000 - $15,000 = $75,750.