Is depreciation expense an operating expense?

CFA Level I FRA
#1

Is it?

I saw a question where the answer says depreciation expense is not included in calculating NOI.

#2

Zfx, check the very bottom of page 210 of the Deriv/Alternative Investments book. It does mention that NOI doesn’t include depreciation.

#3

Ok I will check it out thx!

Just that I don’t have books with me right now and I was googling about it. Some web says Operating expense includes depreciation expense…

So it seems confusing.

#4

Yep, depreciation is a non-cash operating component but because it is non-cash, we have to add it back to get CFO.

I am pretty sure the question you were referring to has to do with real estate valuation in the alts section. By using the income approach and the direct capitalization method, you take NOI (income less operating expenses like property taxes, insurance, maintenance and utilities) and divide it by the capitalization rate. We do not include depreciation, financing costs or income taxes in the NOI figure.

#5

So Net Operating Income is similar to EBITDA but Operating Income is EBIT?

#6

But NOI is specific to Real Estate valuation, at least according to our curriculum books. So NOI as applicable to real estate valuation, is “similar to EBITDA and represents the income to the property after deducting operating expenses, including property taxes, insurance, maintenance, utilities, and repairs but before depreciation, financing costs, and income taxes.” The part in quotes is from page 210.

#7

^ Ok thanks. It’s confusing since the terms are similar.

#8

Thanks!