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CABARRUS COUNTY 2012 APPRAISAL MANUAL <br />IDENTIFY OPERATING EXPENSES <br />In order to estimate a net annual income it is necessary to calculate the amount that goes to the purchaser - <br />investor after deductions for the actual operation of the property are made. These deductions are called <br />operating expenses, however, these deductions DO NOT include mortgage payments and depreciation. There are <br />three basic categories of operating expenses. <br />FIXED EXPENSES <br />These are expenses which vary very little, if at all, with occupancy from year to year and have to be paid <br />whether the property is occupied or vacant. Taxes and Property Insurance are the two major items in this <br />category. It must be remembered that these expenses need be deducted only insofar as they are an <br />expense incurred by the property. <br />VARIABLE EXPENSES <br />Included in this category are such expenditures as management fees, payroll and personnel, supplies and <br />materials, utilities, grounds care, etc. These tend to vary, at least in part, with the percentage of <br />occupancy. Much depends on the type of property, the climate and the landlord- tenant relationship as to <br />expenses incurred. <br />REPAIRS AND REPLACEMENTS <br />These items vary from year to year and tend to be concentrated in some years. For valuation purposes it <br />is necessary to spread the cost of certain major repairs and /or replacements over their useful life. <br />Dividing the replacement cost for each category by the forecast useful life yields an annual payment to <br />cover replacement. Some typical items would be air conditioners, heating systems and roof covers. <br />SOURCE OF OPERATING EXPENSE DATA <br />There are basically three sources for providing information on operating expenses of properties. Sources are past <br />experience of the subject, market experience of similar properties and published studies and reports on local, <br />regional and national fronts. <br />NET OPERATING INCOME <br />Net operating income (NOI) is the annual dollar amount that a property is capable of producing under typical <br />conditions and is equal to the gross income less vacancy and collection losses and operating expenses. <br />Example: Gross Income (20 apt. @ $1200 /year) <br />Less 5% Vacancy & Collection <br />$24,000 <br />1,200 <br />$22,800 <br />Less 35% Operating Expenses <br />Net Operating Income (NOI) <br />Cabarrus County — 2012 Revaluation <br />7,980 <br />$14,820 <br />INCOME PROPERTY VALUATION 8- 4 <br />05/24/01 <br />Attachment number 9 <br />G -6 Page 275 <br />