Which of the following formulas represents the operating expense ratio?

The formula for the operating expense ratio is essential for understanding the efficiency of a property's management by showing the proportion of income that is consumed by operating expenses. The operating expense ratio is calculated by taking the total operating expenses incurred for a property and dividing that figure by the effective gross income generated by that property.

This ratio is crucial for investors and appraisers as it provides insight into how much of the property’s income is utilized for operational costs. By using effective gross income in the denominator, the ratio accounts for any vacancy loss or collection loss, offering a more realistic view of the operating expenses in relation to the income that is actually expected to be received.

In the context of the other choices, the first choice incorrectly uses net operating income, which does not focus solely on expenses. The second option includes debt service, which is not part of operating expenses and therefore misrepresents the ratio. The fourth option divides operating expenses by potential gross income, which is not reflective of the actual income the property generates. Thus, the formula that accurately depicts the operating expense ratio is operating expenses divided by effective gross income.