One of the most important preliminary tools used in evaluating commercial real estate is the Annual Property Operating Data (APOD) worksheet. It tells the story of how the property is currently operating as of the first year of operation. There are limitations to the analysis due to the fact that it only looks at the first year’s operation and also does not take into account tax implications; yet it is still an incredibly powerful tool. Let’s look at some of the elements of the APOD and how they benefit the potential investor.
Potential Rental Income: This is the total amount of income the property would produce at 100% occupancy including all of the units in a building at the current rental rate.
Effective Rental Rate: The effective rate is the potential income minus vacancy and credit losses. This figure should take into account historical vacancy rates as pertains to this property and like kind properties. If the property being evaluated is a single unit building, it can be prudent to include amortized vacancy losses into the equation.
Gross operating income: This calculation is the effective rate plus any additional income the property may bring in. This figure can be anything from a laundry facility to a vending machine to cellular tower income.
Net Operating Income: The NOI is perhaps the most important figure to understand since many calculations (ie. the cap rate) are based upon this. The NOI is the gross income less any expenses the property may incur. Some examples of expenses are property taxes, property management, advertising, legal services or any other costs incurred to the operation of the property.
Cashflow Before Taxes: This typically the last calculation in the APOD. It is the pre-tax figure which subtracts the debt service(s) from the net operating income. Here is where you also subtract any annual leasing commissions and funded reserves for future capital improvements.
Once again, the APOD is a powerful tool in evaluating real estate. Although it does have its limitations, think of it as a preliminary exam into the health of the patient. More in-depth probing is needed before making a decision, but this is the first place to start. If you would like examples of APOD, please contact us and we would be happy to provide.