Net Operating Income

NOI is the single most important number in commercial real estate valuation because it represents the actual cash a property generates from operations before financing costs. Lenders, appraisers, and investors all rely on NOI to underwrite deals, calculate cap rates, and determine debt service coverage. A property's value is almost always derived by dividing its NOI by the prevailing market cap rate for comparable assets.

Calculating NOI starts with potential gross income, which includes all scheduled rents, percentage rents, parking revenue, laundry income, and any other ancillary income streams. From this, you subtract vacancy and credit loss to arrive at effective gross income. Then you deduct all operating expenses: property taxes, insurance, utilities, management fees, maintenance, and repairs. Importantly, NOI does not include mortgage payments, tenant improvement costs, leasing commissions, or capital expenditures since these vary by owner and financing structure.

Investors should be cautious about the distinction between trailing NOI (based on actual historical performance), in-place NOI (current leases), and pro forma NOI (projected future performance). Sellers often market properties based on pro forma NOI, which can be significantly higher than actual results. Diligent underwriting requires verifying NOI through rent rolls, operating statements, and tax returns.