BOMA Financial Management & Reporting Flashcards

Which financial metric measures a property's ability to generate income relative to its total value, calculated as NOI divided by property value?

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.

What does Net Operating Income (NOI) represent in commercial property analysis?

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.

In property budgeting, what is a 'zero-based budget' approach?

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.

What is the 'debt service coverage ratio' (DSCR) and what does a ratio below 1.0 indicate?

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.

Which accounting method records revenue when earned and expenses when incurred, regardless of when cash is received or paid?

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.

What does 'straight-line rent' reporting require for long-term commercial leases under GAAP?

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.