Operating Expense Ratio - How to correctly calculate?

[Damon D.]

When calculating the operating expense ratio for a property, do you leave the vacancy & credit loss allowances as part of the income when you calculate the ER, or do you first back out the vacancy & credit loss allowance from the income side and then add these items to the expense side before calculating the ER?

Here's what I mean by way of two scenarios:

[b][u]Scenario #1

[/b]INCOME
Gross Scheduled Income $100,000
less Vacancy Allowance -$5,000
less Credit Loss Allowance -$5,000
Expected Gross Income $90,000

[b]EXPENSES
Total $40,000

Operating Expense Ratio = 44%

[/b][/u]Scenario #2

INCOME $100,000
EXPENSES $40,000 + $5,000 + $5,000 = $50,000
Operating Expense Ratio = 50%

Thanks!