Page 83 - Trump University Commercial Real Estate 101

Ho w to Read a Deal

Commercial properties usually produce income. There are three
types of income:

1. Gross Potential Income
2. Effective Gross Income
3. Net Operating Income

Gross Potential Income is all the money that comes into the prop-
erty. This includes not only rental income at full occupancy, but
vending - machine income, late fees, and anything else collected from
the property.
Effective Gross Income is calculated by subtracting the dollar value
of vacancies from the gross potential income.
Net Operating Income is the money you have left over after making
your mortgage payments and funding capital expenses (for instance,
roof repairs). It ’ s usually referred to as NOI , and is calculated by sub-
tracting operating expenses from effective gross income.

NOI Effective Gross Income Operating Expenses
Note that I mentioned two types of expenses: Operating Expenses
and Capital Expenses. Operating expenses are those that happen during
the day - to - day operations of the property. They include taxes, insur-
ance, repairs, maintenance, administrative expenses, management fees,
payroll, marketing, contracted services, and utility expenses.
One good feature of operating expenses is that you usually can deduct
them from your income taxes in the year in which you paid them.
Capital expenses are typically larger repairs that are not consid-

ered immediate. They can only be depreciated — that is, deducted — over
several years. Examples of capital expenses are replacing roofs, paint-
ing the exterior of the property, and replacing appliances and carpet.
These are called below - the - line expenses because they show up after NOI
has been calculated.
We ’ ll come back to these income measurements later.

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