The first step in reconstructing the income and expense statement is to determine the ___________.

The first step in reconstructing the income and expense statement is to determine the potential gross income. This figure represents the maximum income that a property could generate under optimal conditions, assuming 100% occupancy and no losses due to vacancies or credit issues. It serves as the foundation for the income approach to valuation since it establishes the upper limit of revenue that the property can earn.

Following the potential gross income, appraisers analyze how various factors such as vacancies, rent concessions, and other income adjustments will impact the effective gross income. However, starting with potential gross income allows for a clear understanding of the property's earnings potential before accounting for these operational losses and expenses.

This foundational step is essential in providing a reliable picture of the property's income-generating capacity, which appraisers use as a baseline for further calculations and assessments in the income and expense statement reconstruction process.