Building a Net Operating Income Statement for a Saudi Property, Line by Line

How to construct an operating statement for a Saudi rented building from leases, invoices and inspection, in the order that stops you double counting or missing a cost.

Net operating income is collectable rent plus any other income the property earns, less every operating cost the owner carries, before financing and before tax. It is the number that valuation, lender cover ratios and your own distribution all rest on, so it deserves to be built from source documents rather than estimated as a percentage. The sequence below moves from the leases outward, which is the order that prevents the two classic errors: counting the same cost twice and forgetting a cost that nobody invoices.

Before stage one

You cannot build this statement from a listing. You need the building, its paperwork and someone who will answer questions about both. Start only when you have access to the tenancy records and at least a full year of operating invoices, because an operating statement built on assumptions is just a wish with subtotals.

• A rent roll listing every unit, its area, its tenant, its rent and its lease expiry.
• Registered tenancy contracts for each occupied unit, so you read terms rather than summaries.
• Twelve to twenty-four months of utility, maintenance, insurance and service invoices.
• The current management or caretaking agreement, including how the fee is calculated.
• A walk through every floor including the roof, the plant room and the car park.

Stage 1: Reconstruct the rent roll from contracts

Build the rent roll yourself from the signed and registered contracts rather than accepting the seller's version. For each unit record area, contracted annual rent, payment frequency, start and expiry dates, any rent-free or discounted period, the deposit held, and who pays electricity and water. Where a unit is empty, record the rent last achieved and the date it fell vacant. Differences between your version and the seller's version are the most productive questions you will ask in the whole process.

• Deliverable: A unit-by-unit rent roll reconciled to registered contracts, with every variance listed.
• Owner: Buyer or the buyer's adviser, not the selling agent.
• Approval gate: No line in the statement may rest on a rent that no contract supports.

Stage 2: Convert contracted rent into collectable rent

Contracted rent assumes full occupancy and full payment. Collectable rent does not. Compare the rent roll against the bank statements or receipts for the same period to see what actually arrived and when. Set a vacancy allowance from the building's own letting history and the depth of demand for that unit type in that district, and a bad debt allowance from the collection record you have just examined. Record both as explicit lines so a reviewer can challenge them.

• Deliverable: Gross potential rent, less vacancy, less bad debt, giving effective rental income.
• Owner: Buyer with the property manager's input.
• Approval gate: Both allowances are evidenced from this building, not borrowed from a market rule of thumb.

Stage 3: Add the other income the property earns

Rent is seldom the only income. Parking bays let separately, signage or antenna rights, storage rooms, laundry or vending arrangements and recharged service items all belong here, as do recoveries where the lease genuinely allows them. Treat each stream the way you treated rent: find the contract, check the term, and ask whether it survives a change of owner. Income that depends on a personal arrangement with the departing owner usually does not.

• Deliverable: A schedule of ancillary income with the contract or arrangement behind each line.
• Owner: Buyer with the seller's cooperation.
• Approval gate: Any stream with no documentation is shown at zero in the base case.

Stage 4: Build the operating cost schedule from invoices

Work through the invoice file and group costs into stable categories: management, cleaning and security, common area electricity and water, lift and pump servicing, air conditioning maintenance, insurance, pest control, landscaping, waste, minor repairs and any municipal or licensing items the owner carries. Annualise each one honestly. A category with one invoice in the file is not an annual cost, it is a single event, and a category with no invoices may simply mean the work was never done.

• Deliverable: An annual operating cost schedule by category, cross-referenced to invoice numbers.
• Owner: Buyer or an appointed property consultant.
• Approval gate: Every category reconciles to at least one invoice or a signed contract.

Stage 5: Price the costs the current owner is not paying

This is the stage most buyers skip and most regret. An owner who manages the building personally shows no management fee, but you will pay one. An owner who defers servicing shows a low maintenance line that your first year will correct. An owner who insures nothing shows no premium. Add a market management fee, a realistic maintenance allowance for a building of that age and condition, and insurance at a quoted figure, even where the historic statement shows none.

• Deliverable: An adjustment schedule bringing the statement to a normalised, arm's length cost base.
• Owner: Buyer, with quotations from a manager and an insurer.
• Approval gate: Each adjustment is supported by a quotation or a comparable contract, not an assumption.

Stage 6: Separate capital items from operating costs

Replacing a lift motor, recoating a roof, rewiring a riser or refitting a bathroom to re-let a unit are capital items. They do not belong in net operating income, but they must appear somewhere or your cash flow is fiction. Move them into a capital expenditure schedule with timing and cost, built from the condition of the actual plant rather than a flat percentage, and keep operating maintenance for the recurring work that keeps the building running.

• Deliverable: A dated capital expenditure schedule sitting beside, and outside, the operating statement.
• Owner: Buyer with a technical surveyor.
• Approval gate: No cost appears in both the operating schedule and the capital schedule.

Stage 7: Present net operating income and test it

Set the statement out as gross potential rent, less vacancy and bad debt, plus other income, giving effective gross income, less total operating costs, giving net operating income. Then test it. What proportion of effective gross income is going out in costs, and is that plausible for this type and age of building? Which single line, if wrong by a quarter, would change your decision? Write the answer down, because that line is where your remaining diligence budget should go.

• Deliverable: A one-page operating statement with a note on the two most fragile lines.
• Owner: Buyer.
• Approval gate: The statement is signed off by whoever will be accountable for the distribution it implies.

Stage 8: Hand the statement to valuation and financing

The same statement should feed the valuation discussion, the lender's cover test and the investment memo. Handing a different set of numbers to each audience is how deals unravel late. Reconcile your figure against the accredited valuer's view, and where it differs, understand why: often the valuer has normalised a cost you left historic, or has taken a market rent where you took a passing rent.

• Deliverable: One agreed operating statement referenced by the valuation, the finance request and the memo.
• Owner: Buyer as the single owner of the number.
• Approval gate: Any later change to the statement is versioned and circulated to everyone relying on it.

Handovers between stages

The two handovers that cause the most damage are between the rent roll and the cash flow, and between the technical survey and the capital schedule. In the first, a lease term read loosely becomes an income assumption nobody rechecks. In the second, a surveyor's comment about a plant item at the end of its life never reaches the model. Insist that whoever prepares each input signs the line it feeds, and that the surveyor sees the capital schedule you built from their report.

How you know it is finished

The statement is finished when a stranger could reproduce it from the file you hand them, when every line traces to a contract, an invoice or a quotation, and when you can name the assumptions that carry the decision. Tax, financing costs and your own structure sit below this line and come next, and the treatment of each depends on rules that are amended periodically and on your specific position, which is a question for a licensed tax adviser rather than a spreadsheet.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.