BOMA Financial Management & Reporting Flashcards

What is 'return on investment' (ROI) in the context of commercial property improvements?

Answer: Net income generated by an improvement divided by the cost of that improvement, expressed as a percentage

ROI for a property improvement is calculated by dividing the net additional income or value created by the improvement by its total cost, helping managers prioritize capital spending decisions.

In commercial real estate, what does 'operating expense ratio' (OER) indicate?

Answer: The percentage of effective gross income consumed by operating expenses

The operating expense ratio compares total operating expenses to effective gross income, indicating how efficiently a property is being managed; lower ratios generally indicate better management efficiency.

What is a 'pro forma' financial statement in commercial real estate?

Answer: A projected financial statement showing anticipated income and expenses for a future period

A pro forma is a forward-looking financial projection showing anticipated revenues, expenses, and NOI based on assumptions about future occupancy, rental rates, and operating costs.

What does 'tenant improvement allowance' (TIA) represent on a property's financial statement?

Answer: Capital expenditure by the landlord to prepare space for a specific tenant, often amortized over the lease term

A tenant improvement allowance is the landlord's contribution to preparing a space for a specific tenant's use, typically treated as a leasing cost amortized over the lease term or capitalized as a leasing commission.

In property cash flow analysis, what is 'before-tax cash flow' (BTCF)?

Answer: NOI minus annual debt service (principal and interest payments)

Before-tax cash flow is calculated by subtracting total annual debt service (principal and interest) from net operating income, representing the actual cash available to equity investors before tax obligations.

What is a 'sensitivity analysis' used for in commercial real estate financial modeling?

Answer: Testing how changes in key assumptions (vacancy, rent growth, cap rates) affect projected returns

Sensitivity analysis tests how changes in critical variables—such as occupancy rates, rental growth, operating costs, or exit cap rates—impact projected financial returns, helping investors understand risk under different scenarios.