Telephone Expense

Definition of Telephone Expense

In the context of commercial mortgages and property underwriting, Telephone Expense refers to the periodic costs associated with maintaining telecommunication services necessary for the operation, management, and security of a commercial real estate asset. It is classified as an operating expense (OpEx) and is a line item factored into the calculation of a property’s Net Operating Income (NOI).

Detailed Description

When a lender evaluates a commercial mortgage application, they perform a rigorous analysis of the property's historical and projected financial statements. Telephone Expense represents the functional communication overhead required to keep the property running efficiently. While it may seem like a minor utility, it plays a critical role in the safety and administrative infrastructure of the building.

Common components included under this expense category include:

• Management Office Lines: Landlines or VoIP services used by onsite property managers and leasing agents to communicate with tenants, vendors, and ownership.
• Emergency and Life-Safety Lines: Dedicated phone lines required for elevator emergency buttons, fire alarm monitoring systems, and security gate intercoms.
• Staff Communication: Costs for cellular phones or mobile devices provided to onsite maintenance staff and security personnel.
• Internet Bundling: In modern underwriting, "Telephone Expense" is often bundled with internet and data costs if they are provided by the same telecommunications utility.

Significance in Commercial Mortgage Underwriting

Lenders scrutinize Telephone Expenses for several specific reasons during the loan approval process:

1. Calculation of Net Operating Income (NOI): Since the maximum loan amount is typically determined by the property's NOI, every dollar spent on telecommunications reduces the income available to service the debt. Lenders look for "normalized" expenses, ensuring the telephone costs align with market averages for similar property types.

2. Debt Service Coverage Ratio (DSCR): By accurately accounting for telephone costs, lenders can calculate a realistic DSCR. If these expenses are omitted or understated, the property may appear more profitable than it actually is, leading to potential over-leveraging.

3. Operational Continuity: Lenders want to ensure that essential services—specifically elevator and fire alarm lines—are consistently funded. A lapse in payment for these specific telephone lines could lead to code violations, increased insurance premiums, or the loss of the building's Certificate of Occupancy.

4. Expense Reimbursements: In many commercial leases (such as Triple Net or NNN leases), these expenses may be passed through to the tenants. A lender will analyze whether the Telephone Expense is a "gross" expense paid by the landlord or a "reimbursable" expense, which impacts the overall valuation of the asset.

Note: With the advent of cellular-based monitoring and VoIP technology, many property owners have seen a decrease in traditional "Telephone Expenses," though these have often been replaced by higher "Data" or "Internet" line items in the budget.