NOI (Net Operating Income)
Net operating income is a property's annual revenue minus operating expenses — taxes, insurance, utilities, management, repairs — before loan payments, income taxes, depreciation, and capital expenditures. NOI is the foundation of commercial real estate underwriting: it drives value (via cap rate), loan size (via DSCR and debt yield), and deal comparisons.
NOI = Effective Gross Income − Operating ExpensesLenders re-underwrite NOI rather than accepting the owner's figure: they apply a vacancy allowance even for fully occupied buildings, add a management fee even for self-managed properties, and may use market rents instead of above-market leases.
Small NOI changes move value significantly. At a 6% cap rate, every $10,000 of additional NOI adds roughly $167,000 of property value.
A building collecting $900,000 in rent with $340,000 of operating expenses has an NOI of $560,000.
Frequently asked questions
What is excluded from net operating income?
Debt service, income taxes, depreciation, capital expenditures, tenant improvement allowances and leasing commissions all sit below the NOI line. The exclusions are deliberate: they are the items that depend on who owns the building and how they financed it, so removing them leaves a figure that describes the property itself.
What is the difference between NOI and cash flow?
NOI stops before debt service; cash flow is what the owner keeps after it. Two owners of the same building — one leveraged, one all-cash — report identical NOI and very different cash flow. That independence from financing is why lenders, appraisers and brokers compare properties on NOI rather than on cash flow.
Do lenders use in-place lease rent or market rent when calculating NOI?
Typically the lesser of the two. Underwriters compare each contract rent against a market rent survey and take the lower figure, so above-market or short-dated leases are cut back to market. It rarely works in reverse: a below-market lease is usually held at its contract rent until the lease actually rolls.
What is untrended NOI, and why do lenders refuse trended rents?
Untrended NOI holds rents and expenses flat at today's levels. Trended NOI applies annual growth assumptions to future rent. Most commercial lenders underwrite untrended, because a projection that depends on rent growth transfers market risk onto the loan — and if the growth does not arrive, the coverage that sized the loan never existed.