How To Treat Reserves (Financial Model) Sorry if its a dumb question!
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[{"id": "gdkq006", "text": "Always good to ask the question because it\u2019s not universal. I include reserves in the NOI but realize that others may not so I\u2019m careful when cap rates are quoted for comparison.", "replies": [{"id": "gdmke83", "text": "What\u2019s the logic for including them above the line? Do you also include capital expenditures above the line?", "replies": [{"id": "gdog0ut", "text": "How else do you address items like roof replacement? Can\u2019t include that in R&amp;M. If the roof needs replacing this year or next, sure, below the line, but then it\u2019s not a reserve it\u2019s a capital cost.", "replies": [{"id": "gdolh4h", "text": "Capital reserves are meant for capital expenditures like roof replacement, so if you aren\u2019t counting capital expenditures above the line why would you include the rainy day fund for those items above the line?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gdkx6iz", "text": "I include them in the NOI calc, but always confirm when looking at the number.", "replies": [], "depth": 1}, {"id": "gdkxodz", "text": "Depends on if you are the buyer or the seller :-) Generally, like OPEX they are below the line for valuation/lenders", "replies": [{"id": "gdmjqwj", "text": "Why would opex be below the line?", "replies": [], "depth": 2}, {"id": "gdmnn8r", "text": "Hey, I think you have different terminology than US norms. Why would opex, or operating expenses, be below the NOI line?", "replies": [{"id": "gdo35vv", "text": "Meant to say CAPEX, not opex :-( sorry", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gdl3tc8", "text": "Hotel, senior housing and multi subtract reserves to get to adjusted NOI. Other property types go below the line.", "replies": [], "depth": 1}, {"id": "gdlh3l2", "text": "Appraiser here. I put them in with operating expenses. Usually 2 or 3% of the effective gross revenue.", "replies": [], "depth": 1}, {"id": "gdlhym2", "text": "I do below the line for retail, industrial and office in Canada", "replies": [], "depth": 1}, {"id": "gdm87m8", "text": "Always put them below the line. From an investment perspective NOI should only include total income - total expenses = NOI. From there you take out capital reserves in the same way you would take out an asset management fee. NOI - Capital Reserves = Cash Flow from Operations - Debt Service = Free Cash Flow.", "replies": [], "depth": 1}, {"id": "gdm9bwb", "text": "Reserves always come BELOW the NOI line, that is industry standard. Those who include them in the NOI do not follow industry standard. Cap rates do not factor in reserves.", "replies": [], "depth": 1}, {"id": "gdman2d", "text": "No. Probably should.", "replies": [], "depth": 1}, {"id": "gdmatb8", "text": "Below the line. Work at a rating agency", "replies": [], "depth": 1}, {"id": "gdmerr0", "text": "I have literally never heard of reserves being an above the line item.  It is a capital expense.  It goes below the line.", "replies": [], "depth": 1}, {"id": "gdmf7ow", "text": "Lol pretty funny reading some of the comments. There is no industry standard. Some folks include above the line, some below, and some not at all!", "replies": [{"id": "gdny71y", "text": "Well hospitality is always 4% of GOR as a capital reserve which gets subtracted from EBITDA to get to adjusted NOI. Thats an industry standard. Similarly the GSEs subtract capex per unit for adjusted NOI in resi so I guess that\u2019s an industry standard. It\u2019s been a while since I\u2019ve done seniors but it used to be like hotels where you\u2019d subtract out $1k/unit for capex to get to adjusted NOI. \n\nFrom an investment standpoint though it doesn\u2019t really matter what you call NOI cash flow is the only thing that matters so", "replies": [{"id": "gdom6iy", "text": "Yup. Every hotel proforma I have seen has a capital reserve above the line. Other asset classes may be different.", "replies": [{"id": "gdospk6", "text": "Well it\u2019s a contractual thing - the brands all require 4% of GOR put into reserve so it is an actual honest to god operating expense that you can\u2019t get out of....", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gdmhaak", "text": "Banks underwrite above the line", "replies": [], "depth": 1}, {"id": "gdmlf0c", "text": "Pension fund here. We always do below the line.", "replies": [], "depth": 1}, {"id": "gdmmrhh", "text": "Below the line. Some people will include an adjusted NOI that deducts reserves, TIs and capex, but it's not a common standard.\n\nAlways, ALWAYS be sure to check that a quoted cap rate is on unadjusted NOI though.", "replies": [], "depth": 1}, {"id": "gdmo0ey", "text": "Argus puts it below the line", "replies": [], "depth": 1}, {"id": "gdnll2h", "text": "Net Operating Income just includes operating expenses. Net Cash Flow includes reserves. Below the line.", "replies": [], "depth": 1}, {"id": "gdo17qf", "text": "Always below the line.     \n\nCapital reserves are not operational in nature, they\u2019re capital in nature. Also a non cash expense. I put them below NOI along with asset management fees to get to unlevered cash flow, then subtract debt service to get to levered cash flow.", "replies": [], "depth": 1}]