In our first lesson on the Operating Expense Ratio, we said that borrowers and brokers had an incentive to understate their commercial property's operating expenses. The lower the operating expenses, the larger the commercial loan for which the borrower can qualify.
Commercial lenders therefore use the Operating Expense Ratio to see how much the borrower or broker is fudging his operating expenses. Below are some reasonable operating expense ratios that commercial real estate lenders will believe:
- Multifamily: 35% to 45%
- Triple-Net Leased Buildings: 7% (Management and Replacement Reserves)
- Self Storage: 25%
- Mobile Home Parks: 25% to 40% (Pool? Clubhouse? Closer to 40%)
- Hospitality (Hotels/Motels): 50% to 65%
- Assisted Living: 85% (That's NOT a typo.)
The owner or broker would be foolish to try to get away with operating expenses that are too much lower than those shown above; otherwise, your commercial lender may apply some punitive assumption (say, a 45% operating expense ratio on a multifamily deal) that will just kill your deal.
Remember, pigs get pleasantly plump. Hogs get slaughtered.
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