Analyzing Operating Statements for Commercial Real Estate

I suggest organizing the property’s historical expenses on a grid into their appropriate categories.  It’s good for presentation and it helps to see everything on one sheet.  This way we can easily see if there are any outliers in the expense data.  While doing this, what we are trying to figure out is:

Do all these expenses represent typical day-to-day operations for a property of this type?  Are there any expenses that are not reoccurring?

An example of what to look out for would be capital expenditures.  If you saw an expense line item in one of the years labeled as “Roof” for $25,000, this likely represents a roof replacement rather than typical R&M.  A new roof has a significantly longer useful life and should not require another replacement in the short-term.  Therefore, it would be appropriate to categorize this particular expense item into capital expenditures instead of repairs & maintenance. 

Understanding how to analyze operating statements will help with more accurate expense estimates for the proforma.  This is important because it will have a direct impact on the net operating income, valuation, and potential maximum loan amount.