How much potential rent becomes operating income?
Follow rent, vacancy, reimbursements, and credit losses into the income the property expects to collect.
Annual amounts in dollars. Select a line to see the calculation.
Operating income over five years
Depreciation, amortization, and suspended losses
Case assumptions and how the experiments work
This model follows the five annual operating periods in the Kathy Center teaching case. Purchase price is $48.5 million, leasable area is 300,000 square feet, and Year 1 base rent is $15 per square foot.
- Income: Year 2–5 base-rent growth is 2.00%, 4.93%, 2.25%, and 0.67%. The rent-growth adjustment adds percentage points to each of those rates. Vacancy is 0%, 1%, 1.5%, 2%, and 3%; the vacancy adjustment adds percentage points in all five years. Credit loss is 1% of gross income after vacancy.
- Supplied income schedules: Percentage rent, CAM billings, property-tax billings, and ancillary income remain at the workbook amounts. The vacancy experiment isolates base-rent losses and their effect on credit losses. It does not estimate a tenant-turnover or lease-renewal event.
- Operating expenses: CAM and property-tax costs start at $445,368 and $390,428 and grow at 4% annually in the original case. Their growth rate is editable. Insurance and utilities follow the supplied annual schedules. The management fee is 10% of CAM and property-tax costs, before reimbursements.
- Capital and leasing costs: TI, leasing commissions, and CapEx follow the workbook schedules. Additional CapEx changes spending only in the chosen year and adds one-seventh of that amount to annual depreciation from that year through Year 5. It does not automatically increase rent or property value.
- Financing: The original case uses an 80% LTV, 5% interest-only loan, a seven-year loan term, and 0.5% origination points paid by equity at acquisition. Annual principal amortization is zero. Initial equity shown includes those points.
- Purchase depreciation: Land is 20% and is not depreciated. Structure is 50%, depreciated over 39 years. Seven-year items are 20%; three-year items are 10%. TI spending is depreciated 50% in its first year and 50% over the next six years. CapEx and leasing commissions use seven-year schedules.
- Taxes: The tax rate is 21% in the original case. Negative taxable income accumulates as suspended losses without an immediate cash refund. Prior losses offset positive taxable income. Under the case’s Year 5 disposition convention, all remaining prior losses are released, and unamortized leasing commissions and loan points are deducted.
- Scope: These are annual operating cash flows. The model excludes sale proceeds, loan payoff, capital-gains taxes, and depreciation recapture. Year 5 tax adjustments do not make this a complete disposition or investment-return model. Tax schedules are teaching assumptions from the supplied case, not a current-law tax calculator.
Connect the explorer to the Excel exercise
Use the original case to reproduce a calculation in Excel. Select a line in the explorer to see its formula, numbers, and worksheet reference. Then change one assumption and explain which other lines move.
| Explorer stage | Workbook figures | Calculation to reproduce |
|---|---|---|
| Property income | 5.1–5.7 | Gross potential rent through total operating income |
| Expenses & NOI | 5.8–5.10 | Operating expenses and NOI |
| Capital costs | 5.11 | NOI through unlevered cash flow |
| Financing | 5.15 | Unlevered through before-tax levered cash flow |
| Taxes | 5.12–5.14, 5.16–5.18 | Depreciation, taxable income, suspended losses, and after-tax cash flow |
Source: The supplied Kathy Center solution workbook, Chapter_5_Figures_5.3E (Solution).xlsx, and FIN 355 property-level pro forma lecture slides. Original case values follow the workbook. In particular, Year 1 TI spending is $36,200 and loan points are $194,000.
Amounts display as whole dollars; calculations retain full precision, so independently rounded rows may differ by $1 from a displayed subtotal.