Operating Statements / T12

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What Is an Operating Statement?

An operating statement (also called a profit & loss statement) summarizes a property’s historical income and operating expenses over a defined period. In commercial real estate lending, operating statements are used to determine whether a property generates sufficient, sustainable cash flow to support debt.

Lenders use operating statements to:

  • Calculate Net Operating Income (NOI)

  • Determine Debt Service Coverage Ratio (DSCR)

  • Size the loan amount

  • Assess operational risk and sustainability

What Is a T-12?

A T-12 (Trailing 12 Months) operating statement reflects the most recent 12 consecutive months of actual operating performance.

Why T-12s Matter to Lenders

  • Shows real performance, not projections

  • Captures seasonality (vacancy, utilities, repairs)

  • More reliable than YTD or annualized statements

In underwriting, the T-12 is the baseline. Pro formas are secondary and heavily discounted.

Core Components of a T-12 (How Lenders Actually Read Them)

1. Gross Potential Income (GPI)

Income assuming 100% occupancy and full rent collection.

Includes:

  • Scheduled base rent

  • Contractual rent escalations already in place

Lender focus:
Is this income supported by the rent roll, or inflated?

2. Vacancy & Credit Loss

Represents income lost due to:

  • Physical vacancy

  • Non-payment / bad debt

  • Concessions

Example:

  • Gross Potential Income: $1,000,000

  • Vacancy & Credit Loss (8%): $80,000

 
Effective Rental Income = $920,000

If actual vacancy is below market, lenders often underwrite to market vacancy, not seller performance.

3. Other Income

Non-rent income sources. This is one of the most scrutinized sections.

Common examples:

  • Laundry income

  • Parking fees

  • RUBS reimbursements

  • Storage income

  • Late fees

Underwriting reality:

  • Stable, recurring income may be included

  • Volatile or one-time income is often discounted or excluded

Example Adjustment:

  • Reported Other Income: $50,000

  • Lender-approved Other Income: $30,000

4. Effective Gross Income (EGI)

 
Effective Gross Income = Rental Income (after vacancy) + Approved Other Income

Example:

  • Effective Rental Income: $920,000

  • Approved Other Income: $30,000

 
EGI = $950,000

5. Operating Expenses

Recurring expenses required to operate the property.

Typical categories:

  • Property taxes

  • Insurance

  • Repairs & maintenance

  • Utilities

  • Property management

  • Payroll / on-site staff

  • Landscaping / snow removal

  • Admin, legal, accounting

What Is NOT an Operating Expense

  • Debt service

  • Capital expenditures (CapEx)

  • Owner personal expenses

6. NOI (Net Operating Income)

 
NOI = Effective Gross Income – Operating Expenses

Example NOI Calculation (Before Adjustments)

  • EGI: $950,000

  • Operating Expenses: $500,000

 
NOI (Seller-Stated) = $450,000

Common NOI Adjustments (Real Underwriting Examples)

1. Management Fee Normalization

Seller self-manages and shows $0 management expense.

Lender adjustment:

  • Market management fee: 6% of EGI

  • 6% × $950,000 = $57,000

NOI adjusted downward by $57,000.

2. Property Tax Reassessment

Seller shows current taxes of $80,000.

Post-sale projected taxes: $120,000
Adjustment: –$40,000 NOI

3. Repairs & Maintenance Understatement

Seller reports unusually low repairs.

  • Reported R&M: $20,000

  • Market-supported R&M: $45,000

Adjustment: –$25,000 NOI

Adjusted NOI Example

Item Amount
Seller-Stated NOI $450,000
Mgmt Fee Adjustment –$57,000
Tax Adjustment –$40,000
Repairs Adjustment –$25,000
 
Underwritten NOI = $328,000

DSCR (Debt Service Coverage Ratio) – Real Math

DSCR Formula

 
DSCR = NOI ÷ Annual Debt Service

Example Loan Terms

  • Loan amount: $4,000,000

  • Interest rate: 6.75%

  • Amortization: 30 years

  • Annual debt service: ~$311,000

DSCR Calculation

 
DSCR = $328,000 ÷ $311,000 = 1.05x

Result:
❌ Loan does NOT meet a 1.25x DSCR requirement

What Happens Next?

Lender will:

  • Reduce loan amount

  • Increase interest rate

  • Require interest-only period

  • Decline the deal

This is why brokers must analyze T-12s before submission.

Key Takeaway for Brokers

A T-12 does not tell you how good the deal could be.
It tells lenders how safe the deal actually is.

T-12 Review Checklist for Commercial Mortgage Brokers

Use this before sending a deal to lenders.

1. Document Integrity

☐ Covers full trailing 12 consecutive months
☐ Month-by-month detail provided
☐ Matches ownership entity
☐ No missing or unexplained periods

2. Income Review

☐ Scheduled rent matches rent roll
☐ Vacancy is realistic for market and asset type
☐ Other income is recurring and supported
☐ No reliance on speculative income

3. Expense Review

☐ Property management fee included or normalized
☐ Repairs & maintenance reasonable
☐ Utilities consistent with occupancy
☐ Payroll supported and realistic
☐ No debt service included
☐ No CapEx included

4. Taxes & Insurance

☐ Property taxes reflect post-sale reassessment risk
☐ Insurance appropriate for asset type
☐ Expiring abatements identified

5. NOI & Ratios

☐ NOI math verified
☐ Expense ratio within lender norms
☐ NOI margin reasonable for asset class

6. Underwriting Adjustments

☐ Below-market expenses adjusted
☐ One-time expenses identified
☐ Vacancy stabilized if needed
☐ Underwritten NOI calculated

7. DSCR Reality Check

☐ DSCR calculated using realistic loan terms
☐ Meets lender minimum requirements
☐ Sensitivity to rate increases understood

Broker Rule of Thumb

If the deal only works before adjustments, it doesn’t work.

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Gross Potential Income – Vacancy & Credit Loss = Effective Gross Income