What is a property operating statement in real estate?

What is an Operating Statement in Commercial Real Estate?

An operating statement is a financial document that outlines the income generated from a property and the expenses incurred to operate it, providing a detailed view of the property's financial performance over a specific period. It helps property owners, investors, and managers to assess profitability, manage costs, and make informed decisions about property management, improvements, or potential sale. Operating statements typically include revenue from rents or leases, operating expenses like maintenance, property management fees, utilities, taxes, and insurance, leading to the net operating income (NOI) of the property.

We put together a few commonly asked questions about operating statements, along with answers to each. See below:

What is Typically Included in Operating Expenses?

Operating expenses include all costs associated with running and maintaining the property. This can cover property management fees, maintenance and repairs, utilities (if paid by the property owner), property taxes, insurance, and any other costs directly related to operating the property. It does not include mortgage payments or capital expenditures (major renovations or repairs that increase the property's value or extend its life).

Why are Operating Statements Important for Investors?

The operating statement is crucial for investors because it provides a clear picture of the property's financial performance, helping them assess its profitability, identify areas for cost management or improvement, and make informed decisions about future investments, refinancing, or selling the property.

What Is the Difference Between Operating Expenses and Capital Expenditures?

Operating expenses are the regular, ongoing costs required to operate and maintain the property. In contrast, capital expenditures (CapEx) are larger investments in the property that add value or extend its life, such as major renovations, roof replacement, or adding new amenities. Operating expenses are fully deducted in the year they are incurred for tax purposes, while capital expenditures are typically depreciated over several years.

How Often Should an Operating Statement Be Reviewed?

Operating statements should be reviewed regularly, at least annually, to ensure effective property management and financial performance tracking. Reviewing them quarterly or even monthly can provide more timely insights into cash flow management, allowing for quicker adjustments to operating expenses or rental strategies.

Does the Operating Statement Include Debt Service?

No, the operating statement typically does not include debt service (mortgage payments). The NOI is calculated before accounting for financing costs, providing a pure measure of the property's operating performance independent of how it is financed. Debt service and partnership expenses are considered below the line expenses, and do not impact NOI.