BOMA BOMA Financial Management & Reporting 1 — Questions and Answers
Question 1: Which financial metric measures a property's ability to generate income relative to its total value, calculated as NOI divided by property value?
- Cash-on-cash return
- Capitalization rate (cap rate) (Correct answer)
- Internal rate of return
- Debt service coverage ratio
Correct answer: Capitalization rate (cap rate)
The capitalization rate (cap rate) is calculated by dividing net operating income (NOI) by the property's current market value, expressing the property's income-generating ability as a percentage.
Question 2: What does Net Operating Income (NOI) represent in commercial property analysis?
- Total revenue minus all expenses including debt service
- Effective gross income minus total operating expenses, before debt service (Correct answer)
- Net income after taxes and depreciation
- Revenue minus vacancy loss only
Correct answer: Effective gross income minus total operating expenses, before debt service
NOI is calculated as effective gross income minus total operating expenses (but before mortgage payments and income taxes), representing a property's core income-generating ability.
Question 3: In property budgeting, what is a 'zero-based budget' approach?
- A budget that assumes no revenue growth year over year
- A budget built from scratch each year justifying every expense rather than adjusting prior year figures (Correct answer)
- A budget that targets zero variance between actual and projected costs
- A budget used only for new building construction projects
Correct answer: A budget built from scratch each year justifying every expense rather than adjusting prior year figures
Zero-based budgeting requires property managers to justify every expense from zero rather than using the prior year's budget as a baseline, encouraging critical evaluation of all expenditures.
Question 4: What is the 'debt service coverage ratio' (DSCR) and what does a ratio below 1.0 indicate?
- NOI divided by annual debt service; below 1.0 means the property cannot cover its mortgage payments from operations (Correct answer)
- Total revenue divided by debt balance; below 1.0 means the property is overleveraged
- Operating expenses divided by debt service; below 1.0 means expenses are well managed
- Gross income divided by equity; below 1.0 means the property is undervalued
Correct answer: NOI divided by annual debt service; below 1.0 means the property cannot cover its mortgage payments from operations
DSCR equals NOI divided by annual debt service payments; a ratio below 1.0 means the property's income is insufficient to cover its mortgage obligations from operations alone.
Question 5: Which accounting method records revenue when earned and expenses when incurred, regardless of when cash is received or paid?
- Cash basis accounting
- Accrual basis accounting (Correct answer)
- Modified cash basis accounting
- Fund accounting
Correct answer: Accrual basis accounting
Accrual basis accounting matches revenues to the period they are earned and expenses to the period they are incurred, providing a more accurate picture of financial performance than cash basis.
Question 6: What does 'straight-line rent' reporting require for long-term commercial leases under GAAP?
- Recording rent at the actual cash received each period
- Averaging total lease payments evenly over the lease term regardless of actual payment schedule (Correct answer)
- Adjusting rent for inflation using published indices
- Recording rent only when legally earned after tenant occupancy
Correct answer: Averaging total lease payments evenly over the lease term regardless of actual payment schedule
GAAP requires straight-line rent recognition, which averages total minimum lease payments evenly over the entire lease term, smoothing the effect of free rent periods or step rent increases.
BOMA BOMA Financial Management & Reporting 1
Which financial metric measures a property's ability to generate income relative to its total value, calculated as NOI divided by property value?