BOMA BOMA Financial Management & Reporting

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?

Accepted Answer

Capitalization rate (cap rate)

Answer

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?

Accepted Answer

Effective gross income minus total operating expenses, before debt service

Answer

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?

Accepted Answer

A budget built from scratch each year justifying every expense rather than adjusting prior year figures

Answer

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?

Accepted Answer

NOI divided by annual debt service; below 1.0 means the property cannot cover its mortgage payments from operations

Answer

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?

Accepted Answer

Accrual basis accounting

Answer

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.

BOMA - Building Owners & Managers Association Practice Test

BOMA - Building Owners & Managers Association Practice Test

BOMA BOMA Financial Management & Reporting