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Generally, what is the reasoning for having expense reimbursements as an “Income” line item. Would it not make more sense to have it netting out those expenses in the expense section of the pro-forma? (That way, by looking at the EGI, you can understand how much revenue you are generating from the actual real estate, as opposed to a mix of that and utility reimbursements)
In multifamily underwriting, you’ll see it both ways – neither is incorrect. It really comes down to personal preference and/or how your firm prefers to handle it.
What’s most important is consistency – and this goes for all methodologies you follow in underwriting. Consistency leads to “rules of thumb” that help speed underwriting and make apples to apples comparisons between deals you underwrite.
Personally I prefer to place RUBS income above EGR. There are a couple reasons for this, but the main one is it gives me more transparency to how an asset is being operated. If I’m expecting the ratio of RUBS to Utility expenses (i.e. utility recovery rate) to be say 70% and the operator is only recovering 35%, there’s something I need to explore (perhaps an operating efficiency to be had that will add value?).
Great question!
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