Total General Expenses

Total General Expenses

In the context of commercial mortgages, Total General Expenses (often referred to as Total Operating Expenses) represents the aggregate sum of all costs required to operate and maintain a commercial property on a day-to-day basis. These expenses are essential for the property to function and generate revenue. For lenders, this figure is a critical component in calculating the Net Operating Income (NOI), which is the primary metric used to determine how much debt a property can safely support.

When underwriting a loan, a lender subtracts the Total General Expenses from the Effective Gross Income to arrive at the NOI. This calculation allows the lender to establish the Debt Service Coverage Ratio (DSCR), ensuring the property generates enough cash flow to cover both the operating costs and the proposed mortgage payments.

Common components included in Total General Expenses are:

• Real Estate Taxes: Local government assessments on the property.
• Property Insurance: Premiums for liability, fire, and casualty coverage.
• Utilities: Costs for water, electricity, gas, and sewer that are not directly billed to or paid by the tenants.
• Repairs and Maintenance: Recurring costs for cleaning, landscaping, HVAC servicing, and minor repairs necessary to keep the asset in good condition.
• Management Fees: Costs paid to third-party property management firms, typically calculated as a percentage of collected rent.
• Administrative and Professional Fees: Legal, accounting, marketing, and office supply costs associated with the business of the property.
• Payroll: Salaries and benefits for on-site staff, such as a building superintendent or security personnel.

It is important to distinguish Total General Expenses from "below-the-line" expenses or non-operating costs. For the purpose of commercial mortgage underwriting, the following items are generally excluded from the Total General Expenses calculation:

• Debt Service: The principal and interest payments on the mortgage itself.
• Depreciation and Amortization: Non-cash accounting charges that reflect the aging of the asset.
• Capital Expenditures (CapEx): Major, non-recurring investments intended to extend the life of the building, such as a full roof replacement or parking lot repaving.
• Income Taxes: Personal or corporate taxes owed by the property owner on the profits generated.

Lenders evaluate these expenses by comparing the borrower’s historical records against market standards. If the reported Total General Expenses are significantly lower than market averages, the lender may "normalize" the expenses upward, assuming that costs will eventually rise to meet the market. This conservative approach ensures that the loan is based on a realistic assessment of the property’s long-term financial health.