1 Calculating Gross Operating Income for Commercial Real Estate

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Calculating Gross Operating Income for Commercial Real Estate

This tutorial presents the steps for calculating a commercial real estate property’s Gross Operating Income

(GOI). Please note that commercial real estate practitioners would typically enter these figures on an Annual

Property Income Data “APOD” sheet.

1

About this Guide

The content, format, and problems in this guide derive from coursework designed by Professor Robert J.

Nahigian for REALTOR® University’s Master of Real Estate CRIA course series

.

For more information, inquiries may be directed to the

REALTOR® University Library

.

The figures in this guide are calculated using Microsoft Excel. Many commercial real estate practitioners use the HP-12C or HP-2B calculator when calculating these formulas. Financial calculators sometimes round numbers in a different manner than Excel, so it is always good to compare numbers in Excel to those calculated using a financial calculator as a means of double checking work. If you do not have either calculator on-hand, check out your smartphone or tablet’s app store, as some app stores offer HP-12C or HP-2B apps.

Disclaimer

The information contained in this guide is intended for informational and educational purposes only, and does not constitute legal, tax, investment or other professional advice. Those using this guide should independently verify all information provided to ensure its accuracy and compliance with applicable law.

Definitions:

Scheduled Rental Income

“All of the income the property would bring in if it were fully occupied throughout the year. No expenses have been deducted from this figure” (Peckham, 2006, p. 124).

Vacancy and Collection Loss

→ “A deduction from potential gross income made to reflect income reductions dues to vacancies, tenant turnover, and nonpayment of rent” (Appraisal Institute, 2008, p.

484). To calculate, multiply the vacancy percentage by the Scheduled Rental Income, or subtract the property’s actual vacancies from the Scheduled Rental Income.

Potential Gross Income (PGI)

→ “The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted” (The Appraisal Institute, 2008, p. 457). Also known as “scheduled rental income.”

Effective Gross Income (EGI)

→ “The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses and an addition is made for any other income”

(The Appraisal Institute, 2008, p. 457). PGI = (total effective rental income + other income) – (vacancy

+ credit losses)

Annual Gross Income (AGI) or Gross Operating Income (GOI)

(Scheduled Rental Income – Vacancy) = Effective Rental Income

Effective Rental Income + Other income = GOI (Peckham, 2006, p. 149).

Question 1: What is the Gross Operating Income for the property below?

Scheduled Rental Income:

Tenant A: $ 4,500.00 per month

Tenant B:

Tenant C:

$ 65,000 per year

$ 22,450 per month

Tenant D:

Tenant E:

$ 72,600 per month

$ 8,500 per month

Tenant F: $ 54,559 per year

Other Income:

Parking income:

Real Estate Tax Reimbursement:

Vending machine:

Cell Antennae

$ 46,489 per year

$ 125,800 per year

$ 3,540 per year

$ 3,500 per month

Process:

1.

Start by entering this information in an Excel spreadsheet

2.

3.

4.

Calculate all scheduled rental income and other income on an annual basis

Total up the rental Scheduled Rental Income

Total the Other Income

5.

6.

Total the Schedule Rental Income

Add Scheduled Rental Income total to the Other Income Total to arrive at the GOI

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Answer 1: The Gross Operating Income is $1,633,988

Question 2: What is the Gross Operating Income for the property below?

Scheduled Rental Income:

Vacancy Rate:

$ 552,600

8.5%

Additional Income

Bad Credit:

$ 35,000

2%

Process:

1.

Start by entering this information in an Excel spreadsheet

2.

3.

4.

Calculate Vacancy by multiplying the Scheduled Rental Income by vacancy rate

Calculate Bad Credit by multiplying the Scheduled Rental Income by the bad credit rate

Calculate Projected Rental Income by subtracting vacancy from Scheduled Rental Income and add

5.

Other Income

Calculate GOI by subtracting Bad Credit from the Projected Rental Income to arrive at the GOI

3

Answer 2: The Gross Operating Income is $529,577

Question 3: What is the Gross Operating Income for the property below?

Details:

Monthly Rent:

Market Vacancy Rate:

Other Income:

$180,000

20.5%

$3,522 per month

Process:

1.

Calculate annual dollar amount for Scheduled Rental Income

2.

3.

4.

Calculate annual dollar amount for Other Income

Calculate dollar amount for Market Vacancy Rate by multiplying it with Scheduled Rental Income

Calculate Projected Rental Income by subtracting Vacancy dollar amount from Scheduled Rental

Income and add Other Income

Answer 3: The current gross income or GOI is $ 1,759,464

Question 4: What is the Gross Operating Income for the property below?

Details:

Suite A:

Suite B:

Suite C:

Suite D:

Suite E:

Suite F:

Suite G:

Suite H:

$ 5,200 per month, TAW

$ 42,000 per year

$ 2,530 per month

$ 72,900 per month but currently vacant

$ 6,300 per month; lease expires in 3 months

$ 45,900 per year; lease expires in 7 months

$ 55,900 per year projected

$ 25,500 per month for the next 12 months

Process:

1.

Calculate the rent totals for each Suite a.

For Suite A calculate either 0 or 1 month rent for the Tenant-at-will (TAW) as this tenant can cancel the tenancy at any time b.

c.

d.

e.

For Suite D calculate $0 as it is vacant

For Suite E calculate rent for 6 months

For Suite F calculate rent for 9 months

For Suite G calculate $0 as rent is “projected” and not actual

Calculating rent via the above steps accounts for vacancy 2.

3.

4.

Total up the rents for Suites A through H to calculated the Projected Rental Income

Since there is no Other Income or Bad Credit, total the rents and you have the Gross Operating Income

4

Answer 4: The Gross Operating Income for this property is $429,235

Question 5: What is the Gross Operating Income for the property below?

Details:

Suite 1:

Suite 2:

Suite 3:

$ 2,175 per month

$ 950 per month (TAW)

$ 650 per month

Suite 4:

Suite 5:

Vacancy:

$ 1,900 per month

$2,100 per month (Vacant)

5%

Process:

1.

Calculate the annual income for each suite. a.

For Suite 2 calculate either 0 or 1 month rent for the Tenant-at-will (TAW) as this tenant can

2.

3.

a.

cancel the tenancy at any time

For Suite 5 calculate $0 as it is vacant

Total up the annual rents for each suite to find the Effective Rental Income

Since we have already calculated for actual vacancy, there is no need to use the market vacancy rate; in this case the Effective Rental Income is the Gross Operating Income

5

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Answer 5: The Gross Operating Income for this property is $57,650

References

The Appraisal Institute. (2008).

The appraisal of real estate

(13 th

ed.). Chicago, IL: The Appraisal Institute.

Nahigian, R. (2013).

Commercial real estate investment an analysis (CRIA) 540: Advanced analytics for real estate investments

. Chicago, IL: REALTOR® University.

Peckham, J. (2006).

A master guide to income property brokerage

(4 th

ed.). Hoboken, NJ: John Wiley & Sons,

Inc.

© 2014 REALTOR® University. All rights reserved. These documents are intended for the sole use of

REALTOR® University faculty and students. No part of these materials may be reproduced, in any form or ny any means, without the permission in writing by REALTOR® University. Contact the REALTOR® University

Library to request permission.

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