Depreciation - Above or Below the Line?

[Brian Keeler]

Hi All,

I am looking over a Statement of Revenues and Expenses for a hotel. I noticed Amortization under Operating Expenses and I was wondering if one would want to include that number in the NOI or not.

Thanks

[James Storey]

Hello Brain

You wouldn't want to include any amortization or depreciation expenses in your NOI projections. These expenses are only in regards to the cost and deductions of the specific owner and wouldn't be transferred verbatim with ownership. You could make assumptions on depreciation and amortization based on the cost of acquisition for your tax situation (below the line deduction) but as a non cash expense, it should not be added into NOI to project a value or future before tax cash flows.

I would back that out and any interest expenses the hotel has on the P&L to come to a projected NOI. You can use interest expense and principal payments to project cash flows if you are assuming any debt obligation. In the end, all you are looking for is unleveraged cash operating expenses that are necessary to operate the business normally to project a true NOI.

James Storey, CCIM