General & Administrative

General & Administrative (G&A) in Commercial Mortgages

In the context of commercial mortgages and real estate finance, General & Administrative (G&A) expenses refer to the overhead costs required to manage and operate a property or the business entity that owns it. Unlike direct operating expenses—such as utilities or landscaping—G&A costs are typically categorized as "back-office" or indirect expenses that are necessary for the legal and professional upkeep of the investment.

For lenders, G&A is a critical component of the Profit & Loss (P&L) statement. It is subtracted from the Gross Effective Income to arrive at the Net Operating Income (NOI), which is the primary figure used to determine loan sizing and the Debt Service Coverage Ratio (DSCR).

Detailed Breakdown of G&A Expenses

G&A expenses encompass a wide variety of administrative functions. While the specific line items can vary depending on the asset class (such as multifamily, retail, or industrial), they generally include:

• Professional Fees: This includes recurring costs for legal counsel, accounting services, and tax preparation required to keep the owning entity in good standing.
• Office Supplies and Postage: Small but consistent costs related to the physical administration of the property, such as stationery, printing, and mailing notices to tenants.
• Management Software: Subscription fees for property management systems, accounting software, or tenant portals.
• Travel and Meals: Expenses incurred by the owner or manager for site visits, inspections, or meetings specifically related to the property’s operation.
• Marketing and Advertising: Costs associated with listing vacancies, maintaining a property website, or signage, though these are sometimes broken out into a separate "Leasing" category.
• Licensing and Permits: Periodic fees paid to local municipalities for business licenses, occupancy permits, or other regulatory requirements.
• Bank Fees: Service charges related to the property's operating accounts and escrow accounts.

The Role of G&A in Underwriting

When a commercial lender reviews a loan application, they perform a process called underwriting. During this process, the lender will analyze the borrower's reported G&A expenses to ensure they are realistic for the market. If a borrower reports G&A expenses that are unusually low, the lender may "normalize" the numbers by applying an industry-standard percentage (often between 1% and 3% of Gross Revenue) to ensure the property is adequately capitalized for long-term management.

Lenders distinguish G&A from Operating Expenses (OpEx) because G&A is often more controllable. However, because G&A directly reduces the cash flow available to pay the mortgage, it remains a focal point for determining the overall financial health and risk profile of the commercial asset.