Lender Guidelines for Operating Expences


Where to Start?:

The best place to start with estimating operating expenses is to look at the previous three years, ie (2005, 2006 & 2007 YTD) and see the trend for the expenses.  If you do not have the previous two years or the year to date expenses, enter what you do have and let our software use the underwriting guidelines to do the first analysis.  See the guidelines in the table below.  After you submit your property one of our loan analysts will contact you with suggestions or questions to help you finalize your submission. 

The most difficult expenses to estimate are Real Estate Taxes, Insurance, and Utilities.  You need some guidance for these expenses.  The prior year expense for utilities + 3% is Industry Standard for utilities (Gas, Electric, Water, Sewer and Trash).  Overall expense ratios can range from 25% to 75% of EGI, and Expense per Unit from $2,000 to $5,000 per unit.

The following guide will give you the basic parameters for calculating forecasted expenses per Investor Appraisal Guidelines for a typical 1960 to 1970 Year Built Garden Style Low Rise apartment building (1-2 Story), with individual meters, laundry room and No Pool. The items in red are the figures for the aforementioned property type.

Underwriting  ITEMIZED EXPENSES: ITEMIZED PROFORMA EXPENSES:
1.200% Real Estate Taxes 1% to 2.50% of Estimated Value or Sales Price.
0.00% Other Taxes & Assess If applicable.
$15 Licenses $10 to $20 per unit per year.
$0.35 Insurance $0.25 to $0.50 per GBA SF.
$175 Gas Estimated from $50 to $500 per unit per year.
$100 Electricity Estimated from $50 to $500 per unit per year.
$300 Water & Sewer Estimated from $200 to $500 per unit per year.
$7.50 Trash $5 to $20 per unit per month.
  Combined Utilities Optional input for gross combined utilities
$25 Pest control $20 to $25 per unit per year.
$250 Maintenance & Repairs Estimated from $250 to $500 per unit per year.
$50 Cleaning & Supplies $50 to $100 per unit per year.
$75 Decorating (Int. & Exterior) $75 to $100 per unit per year.
  Pool Service $175 to $250 per month.
  Payroll (Janitorial, Salaries) Janitorial, Security, Mgt Salary (excluding free rent).
 $5.00 Gardening / Landscaping See actual; $5 to $10 per unit per month (20+ units).
15% Payroll Taxes 15% of Salaries (Custodian, Res Mgr Salary & Security).
  Telephone & Cable If applicable.
$20 Legal & Auditing $20 to $50 per unit per year.
5% Non Res. Mgr (Off site) Typically 3% to 7% of EGI.   Average is 5%.
$25 Res. Mgr. Apt. Allowance Monthly allowance for free rent, or actual IF APPLICABLE. Estimated at $20 to $25 per unit per month.
  Other Administration If applicable.
  Employee Apt Concession Additional Apt for Mgt, Janitor or model unit.
$50 Advertising & Marketing $50 to $100 per unit per year. If applicable.
  Other  
1.00% Miscellaneous Expenses 1% Miscellaneous.  If applicable.
$250 Total Replacements: Estimated Replacement Reserves (Carpet, Flooring, Blinds, Appliances, Water Heaters and Roof).  $200 to $300 unit/year.
Industry standard operating expenses that are used for underwriting by appraisers and lenders are typically different then what the current picture may look like represented by the seller. The most overlooked expenses are:

  • professional management
  • pest control
  • legal
  • replacement reserves
  • unit turnover
Sometimes the expenses may be reported with many items bulked together and impossible to determine which items have been adjusted to current levels and accounted for. You will just have to compare and ask questions. The goal is to understand the picture for the current expenses represented by the seller and make your investor expense adjustments for operating the building. Remember, these investments are a business, and there will be short term and long term costs to run the business.

In many instances an owner operated property does not reflect professional management fees as the owner doesn’t consider them an expense since they are managing the building themselves, however, there is still work involved for management. If a bank had to take the property over they would hire a professional management company to manage the property until disposed of.