Other Expenses

The following expenses that are generally included in the income statement by an accountant are not considered by an appraiser in reconstructing the operating statement.

 

Debt service is the mortgage payment annualized (principal and interest only).  Debt service is not considered an operating expense because it is a choice of the owner to finance the property and has no relationship to operation or value of the property.

 

Depreciation is accounted for by reserves.  An accountant selects the depreciation method which is the most advantageous to the owner.  It is unlikely that depreciation for tax purposes reflect actual depreciation.  

 

Income Taxes are an expense not directly related to the operations of the property.  Income taxes are relative to the owners' financial position, not the operation of the property.

 

Special Costs not related to the property operations are not included in the statement of operating income.  Examples of special costs are lavish expenditures for a board of directors' meetings or an expensive car charged to the operations of the property for tax purposes.

 

Capital Improvements are not included as part of operating expenses.  A capital improvement is an improvement that will increase the rent, rentability, or life of the property.

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