In reconstructing an income and expense statement, what is the first step?

The first step in reconstructing an income and expense statement is determining potential gross income. This step is crucial because potential gross income represents the maximum income that a property could generate if it were fully rented at market rates, without any vacancies or credit losses. It sets the foundation for the entire income approach to valuation by providing a baseline figure from which operating expenses, vacancy losses, and other deductions are applied to arrive at net operating income.

By establishing potential gross income first, property assessors can then effectively analyze the operating expenses, assess market conditions, and project future trends. These subsequent steps rely heavily on a clear understanding of the income potential before making any adjustments or deductions. Therefore, starting with potential gross income allows for a more structured and systematic approach to reconstructing the income and expense statement.