Question of the Week

Under the Income Capitalization approach to valuing real estate, which of the following definitions for net operating income is not true?

a) Net operating income is measured after property taxes.
b) Net operating income is measured before income taxes but after interest expense.
c) Net operating income is measured before interest expense.
d) Net operating income is measured after capital expenditures.


Answer:

The correct answer is: d)

When valuing an entire property, and not just the equity portion in the property, we have to discount all the cash flows that would be available not just to the property owner, but to the creditors as well. Therefore, net operating income is measured before any interest charges are deducted.