Non operating expenses in a P&L


#1

A quick question:
I just received some financials for a MHP that has an owner desiring to sell.
The P&L includes a category called “non operating expenses”.
These expenses total about $22,000, of which about $14,000 is categorized as “bad debt”, and are not included in the NOI calculation.
Is this typical or should it be considered in the net operating income calculation?

Also, “late payments” are included in operating income totaling over $6,000. This seems like more of a red flag than supplemental income.

Thoughts


#2

It is standard for things such as capital expenses, depreciation, and loans on the property to be ignored in operating expenses. (When determining cap rate)


#3

Thanks, that makes sense.
Is it also standard to include late fees as income?

Thanks again

James


#4

Some people include late fees in income, others do not. I personally would not underwrite the property to include that $6,000 of income. That is not part of the park’s true income and therefore you cannot rely on that. Your goal is to have a park where everyone pays. So don’t rely on the $6,000 every year to make or break the park.


#5

I would probably say that I would classify that and other miscellaneous fees as" other income" … that way it shows as income, which it technically is, but not as part of the regular lot fee income.


#6

I’ve seen mom and pop put some pretty interesting things on a P&L. One had church donations of about 5k a year under expenses. I think it’s safe to say that you can pick and choose what’s actually relevant. And I agree that you don’t count late fees as income. If things were running well, that source of “income” wouldn’t be there.


#7

In my experience, late fees approximately equal bad debt so that’s a wash. But I put these both “above the line” in gross income. Before expenses.

Note that non operating expenses still crop up, every year it’s something or other (or else it should be!).

If a space costs $25,000 to build and has a 50-year life, it depreciates at $500 per year and you’ll expect to spend about $500 each year to maintain it. If that space rents for $350, the non operation expense comes to $500/(12*350)=12%. It’s significant. Of course these are averages but roads need repairing and don’t forget fences and pipes and roofs and storms and things happen.

That’s why checking out deferred maintenance is such an important part of DD. If the P&L looks too rosy, it’s probably because owner has been skimping on this item. I think I would say Demand and Deferred Maintenance are the two biggest drivers of value of MHP.


#8

@Brandon , as per your post:

  • “I think I would say Demand and Deferred Maintenance are the two biggest drivers of value of MHP.”

Brandon, I totally agree with you…“Demand and Deferred Maintenance are the two biggest drivers of value of MHPs”.

Unfortunately, there are some Sellers and some Buyers who overlook Deferred Maintenance.

We were once evaluating a MHP with approximately 10 Park Owned Homes. Yearly Maintenance was roughly $1,000 Total for all 10 POHs (=$100 Per Mobile Home Per Year).

Thus, there was LITTLE to NO Maintenance being done on the POHs.

I raised this issue with the Seller’s Real Estate Agent and the Seller’s Real Estate Agent finally agreed that…yes…there was little to no maintenance being done by the Seller.

This means that the New MHP Owner would be receiving lots of Park Owned Mobile Homes needing lots of repair = lots of time and lots of money. In addition the New MHP Owner would receive probably not the highest quality of Tenant.

However, on the opposite side of Deferred Maintenance what if the MHP Owner spent lots of money upgrading Park Owned Mobile Homes?

These POH expenses would look “bad” on the Profit and Loss Statement, but the same expenses would be a great asset to any New MHP Owner.

“Deferred Maintenance” is a HUGE area that both Sellers and Buyers of MHPs need to evaluate and understand.

We wish you the very best!