4.C Quick Question 10

Hi Jack,

This was admittedly a tough question and the course didn’t directly address it. Getting the question right required a bit of intuition and for you to have calculated the Operating Expense Ratio from question 9 correctly.

So to the quiz question. It asked, “Based on what you have learned thus far in the Accelerator, is this property stabilized or unstabilized?”

In terms of how to know, you need only look to the the Operating Expense Ratio. YTD, this office building had 2,982,330 in Total Income compared to 2,551,989 in operating expenses. So before accounting for capital expenditures and debt service, 86% of income is going just to cover operating expenses.

Now I recognize that I didn’t give a range for a typical Operating Expense Ratio for an office building in this submarket (as an FYI, Operating Expense Ratios for office buildings in the U.S. can range from 20% – 50%+). But without even knowing what a typical operating expense ratio for an office building in this area, if 86% of income is going to cover operating expenses we can be sure that the property is not fully stabilized since there won’t be sufficient cash flow left over to even cover capital expenditures, let alone debt service.

To your suggestion about Michael and I creating a section that discusses answers to quiz questions. That’s a great suggestion. I can see that a tool like that would be helpful, and so I’ll discuss with Michael how to make that happen.

Spencer

P.S. After looking further at this question, I’ve revised it slightly to remove one small inconsistency. It had originally clarified that unstabilized meant not fully occupied and stabilized meant fully occupied. That’s not always the case. There are situations where you can have an unstabilized, but fully occupied building. For instance, a single tenant building where the tenant is currently in an extended free rent period would technically be considered unstabilized, since the property is not yet performing to its market potential.