A property's revenue minus operating expenses, before debt service, capital items, and income taxes.
The longer version
Net operating income is a property's income after operating expenses and before debt service. It is the number that drives almost every other measure in commercial real estate: the cap rate prices it, the debt service coverage ratio tests it, and debt yield divides it by the loan.
The calculation runs from the top of the rent roll down. Start with gross potential rent, subtract vacancy and credit loss, add other income such as parking or laundry, and the result is effective gross income. Subtract operating expenses, meaning taxes, insurance, utilities, repairs and maintenance, payroll and management, and what remains is NOI. Debt service, depreciation, income taxes and capital expenditures sit below the line.
The sponsor's NOI and the lender's NOI are rarely the same number, and the difference is underwriting. A lender normalizes vacancy to market even if the property is full, charges a market management fee even if the owner self-manages, adds replacement reserves, and replaces one-time income or expense with a run rate. The result is lower and more durable, and it is what the loan is sized on.
That is why the source documents matter more than the summary. The trailing twelve months of operating statements, the rent roll and the leases are where an underwriter confirms that the income is real and recurring rather than a single good year.
Common questions
- What is net operating income in real estate?
- A property's income after operating expenses and before debt service. It is effective gross income minus operating expenses such as taxes, insurance, utilities, repairs and management. Capital expenditures, depreciation, income taxes and loan payments are excluded.
- How do you calculate net operating income?
- Start with gross potential rent, subtract vacancy and credit loss, and add other income to reach effective gross income. Then subtract operating expenses. What remains is NOI. For example, $1,000,000 of effective gross income less $400,000 of operating expenses gives NOI of $600,000.
- Is net operating income the same as net income?
- No. Net operating income stops before debt service, depreciation and income taxes, so it describes the property's earning power independent of how it is financed or who owns it. Net income is an accounting figure for the owner after all of those.
- Why does a lender's NOI differ from the sponsor's?
- Because the lender underwrites a durable number rather than a historical one. It normalizes vacancy, charges a market management fee, adds replacement reserves and removes one-time items. The resulting NOI is usually lower, and it is what the loan is sized on.
- The CRE due diligence checklistEvery phase of diligence, organized the way deals close.
- What lenders should look for in a due diligence data roomA lender's room is not an M&A room.
- Setting up a data room for a loan closingThe folder skeleton and the first hour.
- UnderwritingWhere this sits in the credit decision.