Renovation cost in P&L

[Nikolas Engel]

Oh boy, I am confused:

I was looking at a P&L statement of a 40+ unit MFH and noticed that seller did not include significant renovation costs to update units each year in the expense section. Those expenses were later subtracted from the NOI to show the final income.

Shouldn't those renovation costs for the replacement of all kinds of interior items appear in the expense section to come to a more accurate NOI? Or is this just usual practice to single out renovation costs - and why would that be acceptable?

Thank you in advance for sharing your experience!

[Charles Dobens]

@Nikolas Engel It sounds to me like your seller accounted for it correctly. Typically you will see sellers try to bolster their NOI and thereby increase the value of the property by miscategorizing expenses and putting them below the line. IN your case, you say that the expenses are ones that are incurred every year. If that is the case, that expense should be placed above the line and expensed when incurred. Sounds to me like that is a turnover cost and that would be considered an operating expense and not a capital expense (a below the line item). The seller is helping you out by categorizing it as an oeprationn expense.