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Old 08-11-2010, 08:55 AM
Ian Valenzuela Ian Valenzuela is offline
 
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Default Profit & Loss Statement Includes "Amortization Expense"

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?
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Old 08-11-2010, 10:14 AM
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Vernon Martin Vernon Martin is offline
 
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If you are speaking of loan amortization, its two components are principal reduction and interest, neither of which are deducted in determining NOI.
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Old 08-11-2010, 12:11 PM
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Ed Falkowski Ed Falkowski is offline
 
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Originally Posted by Vernon Martin View Post
If you are speaking of loan amortization, its two components are principal reduction and interest, neither of which are deducted in determining NOI.
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!
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Old 08-11-2010, 05:39 PM
Ian Valenzuela Ian Valenzuela is offline
 
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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.
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Old 08-11-2010, 05:43 PM
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Vernon Martin Vernon Martin is offline
 
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It's not an operating expense, so would not be deducted in calculating NOI.
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Old 08-11-2010, 07:00 PM
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PropertyEconomics PropertyEconomics is offline
 
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Quote:
Originally Posted by Ian Valenzuela View Post
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.


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.
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Old 08-12-2010, 09:22 AM
Ian Valenzuela Ian Valenzuela is offline
 
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Thank you folks. As always, a swift reply from informed, intelligent professionals is a fantastic resource, and I greatly appreciate your insights.
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Old 08-13-2010, 11:35 AM
CBBoston CBBoston is offline
 
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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.
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Old 08-14-2010, 11:24 AM
Denis DeSaix Denis DeSaix is offline
 
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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:

Quote:
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.
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Old 08-15-2010, 12:18 PM
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Howard Klahr Howard Klahr is online now
 
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Originally Posted by PropertyEconomics View Post
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.
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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