Removing CapEx from expenses

[Abraham Anderson]

I'm looking at a 60 unit property; between the pro-forma and the tax return I received for 2016, there's a 52K discrepancy. I contacted the listing agent who informed me that, on the pro-forma, they removed the 2016 CapEx costs (roof & HVAC replacements) from their list of expenses.

The NOI is already much lower than this property should be at, mainly due to a large number of vacant units (A husband/wife built and managed them, the husband has been sick and recently died, so the property has been mis-managed, the elderly wife wants to get out of them and move to Florida), should I base my offer off the "actual" NOI including CapEx costs, off of theirs, or somewhere in the middle?

One last note, the vacant units are rent ready, so if I acquire this property, task #1 is filling the vacant units.

Thank you.

[Mike Dymski]

Cap ex is technically not a part of NOI...cap ex is a balance sheet item; so, removing it from a P&L is not abnormal for an owner, management company or CPA in internal reports and certainly not abnormal for a broker in an OM. As an example, if the property went through a major renovation in a recent prior period, the renovation cost would not be a part of the property's recent operating net income. Cap ex should be a part of your cash flow analysis but not technically part of NOI.

On the flip side of the coin, many lenders will include cap ex reserves in their underwriting and NOI. I know...there's a disconnect here between the broker and the lender and the reason is their individual objectives....to sell versus to mitigate risk.

In the end, if this is a big value add due to mismanagement and high vacancy, you will not need a lot of precision with the deal calculator.