Multifamily Operating Statements and Expense Normalization
An apartment building’s operating statements tell the story of how the property has performed: what it collected, what it spent and what was left before debt payments. Buyers and lenders rely on them heavily, but seller statements are not always prepared the way a new owner or lender would prepare them. Reviewing multifamily operating statements carefully, and normalizing the expenses, helps turn the seller’s figures into a realistic picture of the building’s earning power.
This article is general information for buyers and owners of existing, stabilized multifamily properties. It does not provide expense benchmarks, and it is not accounting or tax advice. Buyers should work with qualified accountants when reviewing financial records.
What Lenders and Buyers Request
- Annual operating statements for several recent years
- A trailing twelve-month statement showing the most recent full year of income and expenses, month by month
- The current year-to-date statement and budget
- Tax returns for the property or owning entity, where available
- Bank statements and supporting bills for verification
Review the Income Side
Income on the statement should reconcile with the rent roll and bank deposits. Buyers look at gross potential rent, losses from vacancy, concessions and bad debt, and other income such as laundry, parking, pet fees or utility reimbursements. Unusual spikes, such as a one-time insurance recovery or a large catch-up payment from a delinquent resident, should be identified and set aside. Our article on the rent roll audit explains how to test the income.
Why Expenses Need Normalizing
Expense normalization means adjusting reported costs to reflect what the building will likely cost to operate under new ownership. Adjustments buyers and lenders may consider include:
- Property taxes: a sale may lead to reassessment, so the current bill may not reflect future taxes
- Insurance: the seller’s premium may not match what a new owner can obtain
- Management: a self-managing seller may show no management fee, while a lender may include one regardless
- Payroll: unpaid work by the owner or family members may need to be replaced with paid staff or contractors
- Repairs and maintenance: unusually low spending may signal deferred maintenance rather than efficiency
- Utilities: costs should match bills and reflect who pays for which services
- Replacement reserves: lenders may include an allowance for ongoing capital needs
Separate Operating Expenses From Capital Items
Some statements mix routine maintenance with capital replacements, such as a new roof or boiler. Buyers should understand what was capitalized, what was expensed and why, since this affects both reported income and future spending needs.
Remove Owner-Specific and Non-Recurring Items
Debt payments, depreciation, owner travel, personal expenses and one-time legal costs generally do not belong in normalized operating expenses. On the other hand, buyers should be cautious about adding back costs that will actually continue. How specific items are treated for accounting or tax purposes is a question for qualified accountants and tax professionals.
How Normalized Figures Are Used
Normalized net operating income is the starting point for both value and loan sizing. Our articles on multifamily property valuation and multifamily debt service coverage explain how. Lenders will frequently prepare their own underwritten statement, which may differ from both the seller’s and the buyer’s version.
Management Reporting After Closing
Good reporting continues to matter after the purchase. Lenders may require periodic operating statements and rent rolls, and a manager who provides consistent, accurate reports makes that easier. See our article on third-party property management and our overview of multifamily loan requirements.
US Professional Funding helps investors finance the acquisition of existing, stabilized apartment buildings and can help plan financing around normalized property income. Learn more about our multi-family acquisition financing.
