In calculating the net operating income (NOI) of a property, the “above-line” treatment of capital expenditures implies:

Question

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To analyze the treatment of capital expenditures (CapEx) in NOI, we need to separate operating items from non-operating or non-operating capital outlays.
Option 1: 'capital expenditures are excluded from the calculation of NOI.' This is correct because NOI (net operating income) is computed as effective gross income minus operating expenses. CapEx is a capital investment and is considered a balance sheet item or investing activity, not an operating expense, so it is not subtracted when calculating NOI.
Option 2: 'capital expenditures are included in the calculation of NOI.' This is incorrect since CapEx is not part of day-to-day operating costs; including it would mix investing activities with operating performance, distorting NOI.
Option 3: 'capital expenditures are set equal to NOI.' Setting CapEx equal to NOI makes no sense in standard financial reporting; CapEx is not a direct function of NOI, and such a relation would imply a fixed proportional link that does not reflect actual cash flow or accounting classifications.
Option 4: 'capital expenditures are divided by NOI.' Dividing CapEx by NOI would produce a ratio, not the NOI itself, and it does not describe how CapEx is treated within the NOI calculation. This mischaracterizes the defined relationship between operating costs and NOI.
In summary, the conventional approach distinguishes operating expenses from capital expenditures, placing CapEx outside NOI so that NOI reflects core operating performance without the distortions from long-term investment spending.

R E 250 A Final Exam

In calculating the net operating income (NOI) of a property, the “above-line” treatment of capital expenditures implies:

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