Finance: Budgeting, NOI, Debt Metrics, and Controls
Finance on the ACoM exam tests whether you can build and monitor a property budget, calculate lender and owner return metrics, and maintain controls over cash. Expect questions on NOI, DSCR, debt yield, cash-on-cash, variance analysis, and segregation of duties.
Core rules and concepts
- Operating budget: income (base rent, recoveries, percentage rent, parking, other) and expenses (taxes, insurance, utilities, repairs, management, G&A). Capital budget is separate.
- NOI = effective gross income − operating expenses. It excludes debt service, income taxes, depreciation, and capital expenditures; reserves are often modeled below NOI.
- DSCR = NOI ÷ annual debt service; lenders often require 1.20x to 1.35x. Debt yield = NOI ÷ loan amount.
- Cash-on-cash = pre-tax cash flow ÷ equity invested.
- Variance analysis: separate timing from permanent differences, and volume from price.
- Internal controls: segregation of duties, bank reconciliations, approval thresholds, and audit trails.
Worked example
A property has NOI of $480,000 and a $5,000,000 loan at 6.5% interest, 25-year amortization. Monthly payment is approximately $33,800, so annual debt service is about $405,600. DSCR = $480,000 ÷ $405,600 = 1.18x. If the lender requires 1.25x, the loan does not qualify as sized; options are reducing the loan, increasing NOI, or negotiating. Debt yield = $480,000 ÷ $5,000,000 = 9.6%. Reasoning: use NOI before debt service; do not subtract reserves unless the covenant defines NOI that way.
Traps that cost marks
- Using net income after debt service in DSCR.
- Using gross rent rather than effective gross income.
- Mixing cash and accrual results.
- Ignoring reserves, TI, and leasing commissions.
- Annualizing one month without adjusting for seasonality.