Glossary
Operating Expense Ratio (OER)
The operating expense ratio (OER) is a property's total operating expenses divided by its effective gross income. It shows what share of collected revenue is consumed by the costs of running the property, before debt service and capital expenditures, and is used to test whether reported expenses are realistic compared with similar properties.
Formula
Example
An office property has effective gross income of $3,000,000 and operating expenses of $1,200,000. OER = $1,200,000 / $3,000,000 = 40%, and NOI is $1,800,000. If comparable properties run about 45%, the underwriter should check whether expenses are understated, for example by a missing management fee or deferred repairs. At a 45% ratio, NOI would be $1,650,000, or $150,000 lower.
How it is used in underwriting
Underwriters use the OER as a reasonableness check. A ratio far below comparable properties suggests missing expenses, self-management by the owner, deferred maintenance or a tax bill that has not yet reset. A ratio well above peers may indicate inefficient management, or an opportunity for a buyer. Lenders compare a property's OER with its own history, with appraisal data and with internal databases of similar loans, and they typically underwrite expenses at the higher of actual and market levels. Expense line items, not just the total ratio, are then reviewed for taxes, insurance, utilities, repairs, payroll and management.
The ratio depends heavily on lease structure. In gross leased apartments and offices, the landlord pays most costs, so the ratio is higher. Under triple net leases, tenants pay taxes, insurance and maintenance, so the landlord's ratio can be very low, but reimbursement income also appears in EGI. Older buildings, smaller properties and those in high tax jurisdictions tend to run higher ratios. Do not confuse the OER with the expense ratio used in insurance, which measures underwriting expenses relative to premiums, or with the operating ratio used for operating companies.
Typical benchmarks
Ratios vary widely by property type and lease structure. Multifamily commonly runs roughly 35% to 50% of EGI, while triple net retail or industrial properties can be far lower because tenants pay most expenses directly.
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Frequently asked questions
What is a good operating expense ratio?
A good operating expense ratio is one in line with comparable properties of the same type, age, size and lease structure. Apartments often fall roughly between 35% and 50%. A ratio far below peers is usually a warning that expenses are understated rather than a sign of exceptional management.
Are property taxes included in the operating expense ratio?
Yes. Real estate taxes are an operating expense and are included. Underwriters often adjust taxes to reflect reassessment after a sale, which can raise the ratio significantly. Debt service, depreciation, income taxes and capital expenditures are excluded from operating expenses and therefore from the ratio.
How does the operating expense ratio relate to NOI margin?
They are complements. If the operating expense ratio is 40%, the NOI margin is 60%, because NOI equals effective gross income minus operating expenses. Both measure how efficiently a property converts collected income into net operating income available for debt service and owners.
Related terms
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