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Profit & Loss Statement Includes "Amortization Expense"

Discussion in 'Commercial/Industrial Appraisals' started by Ian Valenzuela, Aug 11, 2010.

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  1. Ian Valenzuela

    Ian Valenzuela New Member

    0
    Aug 14, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    This is an RV park, non-franchised, but was purchased as a going concern (for cash) approximately 10 years ago. Do you all typically deduct Amortization Expense (is it really even an expense?) from Gross Income when determining NOI?
     
  2. Vernon Martin

    Vernon Martin Senior Member

    4
    Jun 8, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    If you are speaking of loan amortization, its two components are principal reduction and interest, neither of which are deducted in determining NOI.
     
  3. Ed Falkowski

    Ed Falkowski Senior Member

    2
    Jun 25, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    I second what Vernon said. I can't tell you how many P/L statements I get for apartments where "amortization" eats a HUGE chunk out of GI to determine what they refer as "NOI" (and it's usually close to O or even negative). That's not a deduction for Fee Simple/Leased Fee valuations. It may be included for a going concern valuation... but having never done one of those, I can't say that definitively.

    I've often suspected that amortization is included in OPEX when we see workout deals come across our desks. This way, if the lender sees that the borrower is in a negative cash flow position, they may be more inclined to re-work the loan instead of taking the property through foreclosure. However, you'll never see that when it's for straight up financing... in fact, watch those expenses disappear! :icon_mrgreen:
     
  4. Ian Valenzuela

    Ian Valenzuela New Member

    0
    Aug 14, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    No, they paid cash for it, and still own it free and clear as far as I can tell. According to the CPA, this is a standard line-item he uses to deduct an annual cost of the purchase of the goodwill. I'm having trouble interpreting what he says into appraisal language, but I'm taking it to mean the line item represents loss in business value from the original purchase price included . The Definition from Investopedia refers to "the consumption of the value of intangible assets, such as a patent or a copyright. " To my way of thinking, this sounds like itemized depreciation, and I'm inclined to exclude it from expenses, but I thought maybe someone out there had seen this specific accounting term on a P&L.
     
  5. Vernon Martin

    Vernon Martin Senior Member

    4
    Jun 8, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    It's not an operating expense, so would not be deducted in calculating NOI.
     
  6. PropertyEconomics

    PropertyEconomics Elite Member

    1
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico


    Would love to see the IRS handle that expense line item when there is no expense. The goodwill was paid for in a lump sum. And a CPA ... amazing.

    As far as appraisals go Amortization Expenses are not included as an expense and neither are Depreciation charges ... an allowable expense per the IRS but not included as an operating expense on an appraisal pro forma.
     
  7. Ian Valenzuela

    Ian Valenzuela New Member

    0
    Aug 14, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    Thank you folks. As always, a swift reply from informed, intelligent professionals is a fantastic resource, and I greatly appreciate your insights.
     
  8. CBBoston

    CBBoston Member

    1
    Jan 27, 2008
    Professional Status:
    General Public
    State:
    Massachusetts
    The kind of calculations CPAs do for financial reporting and taxes is different than what we do in valuing a property. He's right, just not in our context. However, we do do amortization when we deduct replacement reserves.
     
  9. Denis DeSaix

    Denis DeSaix Elite Member

    315
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    When I worked in the operations department for a corporation, we used to say that the accounting department had this saying: Early to bed, early to rise, and always, always, amortize.

    We were judged on our operational performance and the amortization line in the P&L lowered our NOI figure. Of course, amortization is an accounting tool used for tax purposes; so the amortization (and depreciation) expenses were always backed-out to judge our performance.

    I'd do the same in evaluating a P&L statement in an appraisal assignment with the exception below:

     
  10. Howard Klahr

    Howard Klahr Senior Member

    110
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    You are correct in that it was paid for as a lump sum when the buyer purchased the property, but the IRS in fact requires that this item be amortized for tax purposes. No I am not an accountant nor did I sleep at a Holiday Inn last night, but yes, the CPA is correct, as is Vern, it is not an operating expense for the purposes of valuation analysis in terms of an appraisal.
     
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